My Rental Porfolio: How much is too much rent?

I’ll shortly find out from our tenants if they’re interested in staying for another year. However a new piece of information has left me scratching my head.

I have really enjoyed being a landlord these last couple of years. A large part of the reason for that has been the quality of the tenants that I’ve had. Our tenants have been very high quality. They pay the rent on time, we have relatively few calls for assistance from them and they maintain the apartment in immaculate condition.

My wife and I expect (and in fact hope!) that our tenants will likely renew. While they have previously indicated that they would like to find their own home, they’ve also recently had a baby and a lack of time to search for a house will probably leave them renting in our apartment for a third year. If that happens to be the end result then I couldn’t be more thrilled.

Not needing to go out and find new tenants means that I want have to outlay cash in bringing the apartment up to scratch for some new occupants.  I would have to do a repainting of the house remove, clean carpets and go through a township inspection as well as all of those other things that comes with trying to move in new tenants . Best of all,  I’ll avoid a one-month broker fee in trying to go through the process of finding a new tenant and also eliminate the risk of my apartment not being rented in between the existing tenants moving out, and a new tenant moving in.

However the biggest advantage in having my existing tenants stay though is that I eliminate the risk of a poor selection of a new tenant for at least another year.

If our existing tenants do decide to stay, we have an interesting decision on our hands. My wife and I decided that we wouldn’t increase the rents to our tenants on the second year of the lease just because they were good tenants and we didn’t want to rock the boat by giving them a reason to think about moving somewhere else.  We didn’t really assess market rates at the time of the renewal, however I suspect that the market rate would have moved up 2 to 3% from the base rental rate that the tenants and I agreed the previous year.

My wife and I were discussing how much if at all we would set the new rent for our tenants for this third rental year. I indicated to her that I didn’t suspect market rents would have moved all that much and suggested to her that perhaps we look at keeping rents flat for a third year and then increase the rents for the following year or more likely have a new set of tenants at that time in which case we could just charge market rent.  My wife rightly suggested that we check with our broker to see just what market rent was.

I was shocked to hear from our broker that in fact current market rents have advanced almost 10% to the base rate that the tenants and I agreed only two years ago.

Now while we would be fully entitled to charge our tenants the full market rent, I have to imagine that a 10% increase is probably going to carry some sticker shock. I’m also sensitive to the new expenses of bringing up a newborn.

I think a key question in my mind is whether it makes sense to perhaps charge them slightly less and show them that we’ve cut them a bit of slack with the thought that maybe that makes the tenants less likely to leave next year and perhaps want to continue on.

I do realize that that’s a slim possibility as it’s unlikely that a few thousand dollars slack will make the difference in committing to such a large expenditure and everything else that goes with having a home of your own. My wife wants to charge our tenants the full market rate and after having given it a lot of thought I’m inclined to agree

In retrospect I think the smart thing to have done would’ve been to implement a gradual rent increase after the first year such that we didn’t have to stick the tenants with such a big increase all at once this year. I guess all of these decisions are part of the fun that goes into being a landlord.

And besides with any luck maybe 10% isn’t really such a big rental increase and our tenants won’t bat an eye at a 10% rent increase after all?!

 

Comments

  1. Soheil says:

    I’m one of those tenants (nice to have!), the second year our rent was increased 2.5%, and I’m sure I wouldn’t be happy with a 10% increase and would start looking around asap.
    To me good tenants should be charged below average, because they’re not “average”, they’re “good”. I’d say be prepared to give them a couple percentages less increase if you see them too shocked! 😉

    • integrator says:

      Hi Soheil,

      I’m inclined to agree with you!. I’ll be sure to pass on this feedback to my wife 🙂 Always nice to hear from someone who is in the same situation. Its easy to become detached from these things and forget that these are decisions that have real life consequences.

  2. Mike A. says:

    Agree, 10% is way too high. My PM told me he could rent it 10% higher IF the current tenants moved, but if you start charging a 10% increase to current, good tenants, you are going to lose those tenants. I increased 3% and was nervous about that, but we didn’t get any flak. Inflation is the real guide.

  3. FerdiS says:

    If it helps, put yourself in your tenant’s position. How would you react to a 10% hike? If I were a good tenant and got notice of a 10% increase, I might just move out of principle, even if I had to pay the same higher rate elsewhere. My thoughts would be: if my landlord is willing to hike my rent by 10% this year, what would prevent them from doing so again next year. On the other hand, if my landlord says a recent market survey indicates that the rental rates for similar properties are 10% higher, but they decided to increase by only 4% because I’m a good tenant, I’d stay and pay the slightly higher than inflation increase.

    BTW, I’m a landlord renting at below market value and I prefer to increase at the rate of inflation, as long as I have good tenants that pay on time and continue to take care of my property.

    Take care!

    • integrator says:

      Ferdi, I have heard of other landlords that also only increase rents at slightly above inflation yearly, unless a new tenant comes in. I think thats a smart policy. It facilitates the trust of your tenants.

  4. Mic says:

    My thoughts after reading this article was wow, another typical no good landlord! I was recently in this position after 3 years of perfect rent payments (never even a day late). My complex always raises to market rates every year and after the third year they wanted another 11%(which is illegal because they gave less than 60 days notice). I wrote them a letter and had to fight really hard to get it lowered down to about 5% which I feel is still too high. There are very few people that get 10% raises! It’s left a bad taste in my mouth and I will do everything I can to find a new place next year. I hope your tenant just moves and you end up with the worst tenant you’ve even dreamed of!

    • Integrator says:

      G’day Mic,

      We actually left the rents flat last year, with no adjustment to market rates. Any increase this year would represent a catch up. We also haven’t decided to make the change, still considering what best to do while keeping the tenants interests in mind also.

      • Mic says:

        Well rents have skyrocketed since 2008, especially in the west because of so many home owners defaulting becoming renters. So you have to do what you have to do. But please put yourselves in your tenants shoes. It would have been much better from their perspective to have a 5% increase both years, rather than being hit with a 10% increase right after a baby is born. Had they gotten a 5% increase last year, they would have almost expected it this year. But this year they are expecting nothing after letting you know they have a new born. So 10% will most likely be sticker shock.

        Now putting myself in your shoes, I look at market rates and since 2008 they have gone up the maximum allowed to by law. And in some cases illegally more than the law allows. I live in a popular area and to my management they could care less if a tenant moves, as it will be occupied as soon as they can clean/repair it. So they always increase the maximum they can get away with. So financially speaking it makes sense for you too as well. But I think you made a mistake giving them a break the first year. And in doing so might lose them to sticker shock. So you might want to consider a 5% increase this year, since they are awesome tenants. But let them know they are getting a break from market rates! If they move bump it up to market rate.

        Now here’s the kicker and unfortunately what you have working to your advantage. If I could have moved to a comparable apartment at a lower rate I would have. But because my landlord has kept rates so close to the competition, other apartments in the same area go for similar rates. So it would have cost me more to move then my increase in rental rate.

        But just like jobs these days there’s no loyalty either way. So as soon as I can get a better deal elsewhere, I’m outta here!

        • Integrator says:

          Mic,

          We are sensitive to the tenants situation and want to appreciate them for being good tenants as well. I think what we’ll end up doing is giving them a below market rent to recognise them for being such good tenants. If they do decide to leave, we’ll list at market rates. There’s something to be said for maintaining good relationships with folks that have been good tenants, low maintenance and maintained your property well.

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