A well established Rent Increase Procedure provides you, a rental property owner, with multiple benefits:
1) Increases or at least maintains the ROI on your rental property.
2) Ensures you keep up with market rent and have funds available for adequate maintenance and repairs.
3) Prevent unintentional (or intentional) favoritism or retaliation toward tenants
This article discusses how Sagareus Real Estate stays current on market rent and how to fairly and ethically increase rents to effectively manage your investment real estate.
First, establish a standard increase schedule; Sagareus plans to increase rent once a year.
Our process starts in a simple excel spreadsheet, here we have columns for each each unit being managed, square footage, current rent, market rent, last increase date, post date, and increase date. This sheet is labelled Rent Schedule.
Within the same file, we have another sheet labelled "Rental Comps" to help us determine market rent for our subject properties. We enter in 3-5 comparable rentals nearby our subject properties, average the $/sqft to determine the market rent for our units, which autofills on our Rent Schedule.
Rental comps can be somewhat of an art to determine, because we don’t have anything that shows us what each unit actually rented for. For example, the landlord may advertise a unit for $1,600 per month but actually lease the unit for $1,450 per month, and we would never know.
The best we can use is the ads. Potential renters are looking at the same ads we are, so as long as we are in the appropriate price range, our pictures and copy are the best on the market, and our lease terms are competitive, we will schedule showings and secure a lease.
Every other month, we go to Zillow and find comparable units. We input the asking rent and the square footage and adjust for parking, water, sewer, garbage, whether there’s a balcony and an elevator, and what kind of rental pet policy is in place.
It's important to be realistic about what your rental is offering. Very often property owners have an over optimistic view of their property features. Only include properties that are within a 10 to 15 year range of your property, if possible. Transportation options including access to freeways, parking, and transit center are major location factors; Layout, flooring, and pet policies are major property factors.
Our spreadsheet allows us to rate the units 0 to 1 to adjust the pricing somewhat, based on these features. For more dated units, we may rate the unit 0.9 to bring down the market rent; Or, on a fully remodeled unit being compared to older units, we may use 1.05 to bring the value up.
You may find that some of your units are at or above what you believe to be market rent. If this is the case, a simple solution is upgrade your rental property. Perhaps install new countertops or upgrade the bathroom for your tenants; Install a ceiling fan or garbage disposal if there isn't one there. If you bring the value of the unit up, your tenant will feel they are paying market rent and be encouraged to extend their lease. If they feel they are paying too much, they will move... wouldn't you?
To increase rents ethically and fairly, set a rent increase policy and document your follow through utilizing this policy.
Our rent increase policy is as follows:
1) Update Market Rent every 3-6 months (March, June, Sept, & Dec)
2) Increase rent once / year; Do not increase more than 1 x per year
3) Provide 60 days written notice
At each review, we update the Market Rent Spreadsheet, save as a pdf document and upload to ourProperty Management Software so it is dated stamped. Any comments and observations are noted here as well, such as, "Not much change from last review" or "New building .3 miles away, 24 units"
We keep careful records so that if someone wants to know why the rent was raised, we can show them the documentation demonstrating how we came to the rental amount.
Document your rent reviews and increases, this shows they are part of your normal routine procedures. There will come a day when someone accuses you of raising their rent as a form of retaliation, and this documented process proves otherwise.
The primary responsibility of a landlord to is increase or maintain the ROI on their asset. By maintaining a regular, consistent and well documented rent increase schedule, landlords are ensuring they keep up with market rent and have available funds to maintain the property appropriately. Falling behind in either of these efforts will diminish returns and result in substandard housing for tenants. Documenting the Rent Increase Procedure keep landlords and tenants alike safe from intentional or unintentional mistreatment or retaliation.