When Should Real Estate Investors Raise Rent?

Posted by Chris Clothier on Wed, Sep 10, 2014

realestateinvestors-raisingrent

Raising rent. Depending on the market, it may become necessary for real estate investors to make adjustments to their rent prices, both up and down. It’s a tricky, temperamental balancing act that all investors face at one point or another.

Set your rent too low beneath the market and you may find yourself with tenants you’d rather not have...and run into trouble keeping up with the mounting costs of running an investment property. If you set prices too high, you’ll find yourself with high tenant turnover as a lowered demand for your property.

How can real estate investors best navigate making changes to rent? There are few things you should consider to make the best investment strategy.

Rent Raising Investment Strategies

Know What’s Important

Keeping a quality tenant is better than having extra change in your pocket at the end of the month. Your prices should be strategic but fair. Your tenants will notice when they’re being taken advantage of, especially if the property doesn’t seem to be worth the price tag. You could always raise rent, but you may drive out tenants you’d rather keep.

Sometimes, it’s worth it to keep prices just under the average market prices for similar properties in the area. When the end of a lease rolls around, you can bet that your tenants will look at their options. Don’t give a good tenant another reason to take their business elsewhere.

Pay Attention to Supply and Demand

Rental units are in high demand — there’s no doubt about that. But that doesn’t mean that real estate investors get to name their price. Supply and demand is constantly changing — existing properties are converted into rentals, apartment builds are on the rise to keep up with demand, and the evolving landscape of the real estate market recovery makes real estate investment both profitable and somewhat unpredictable.

There is high demand, but supply changes. What about your property will ensure that its the best on the block?

If you don’t have outstanding amenities or a prime location to justify a higher rent, you may want to reconsider raising it. Pay close attention to other properties and competitors, especially those that are comparable to your properties. What’s on the market? What are their prices? How are they changing over time, and how can you use those observations to your advantage?

Know Your Local Laws

Local laws matter. As with everything in real estate investment, you need to know the legality of all of your actions. Some areas have laws that limit rent increases with a cap or have other rental control regulations that you should investigate before inadvertently getting yourself into legal trouble. Read up and know that you may have to get approval from the government before raising rent.

Remember Your Lease Agreement

Rent can’t just be raised willy-nilly. You and your tenants agreed to a price, and you have to wait for the agreement to expire before a new lease agreement can be negotiated, including prices, unless you've made provisions for changing it in the agreement.

For month-to-month tenants not locked into an extended lease agreement, it’s a little different. They may decide they want to stay for the long term, and you may want to raise the rent. Pay close attention to these tenants and prep them for the raise. If you’ve offered attentive maintenance and an all-around good living experience, they’re more likely to accept a price hike.

Your Actions Will Have Consequences

When you raise rent, you run the risk of turnover. Are you prepared to handle that?

Vacancies are the most costly time for real estate investors. If you have a single-family property, you’ll want to be sure that raising the rent won’t drive out good tenants and make finding new ones difficult.

Any raises in your rent must be justified. Have you made improvements to property that call with the increase? Are you keeping up with market values?

Sometimes, you need to maximize your rental value, and other times you need to undercut the market. Deciding how to price your properties is no easy task. There’s a learning curve to developing the investment strategies to know the time and place for appropriate changes to rent. The last thing you want to do is lower your own demand — it could really hurt your real estate investments in the long run.

What factors do you consider when deciding on a rent increase? Share with us in the comments.

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image credit: FutUndBeidl

 

 

Topics: investment strategies