Whether you do it yourself or have a property management company do it for you, you need to have a plan for rent increases. Any apartment building with four or more units has the property value dominantly established by the net operating income it produces. If you don't maintain market rents, you lose money both when you collect less rent and again when you sell the building.
The fact is that no tenants want to see their rent increased. However, the other ironic fact is that tenants, not landlords, set the market rate. If the market rate for a two-bedroom apartment is $800 per month all over town and a greedy landlord sets his rent at $1,000, guess what happens? The landlord's income becomes zero when the property sits vacant. It is always a supply and demand market. When there are ample vacancies, rents go down or at least don't go up. When the rental market is tight (as it is in most places today), rents are increased on a regular basis.
The first step to managing rent increases is planning ahead. Always know which tenants have their leases coming due. In most states, you have to give at least a 30-day notice to raise tenants' rents. Make sure you send out notices so they take effect the month after each lease expires.
Few tenants will move out due to a small rent increase. By keeping rents inline with the market, you avoid reaching a time when you need to jack up a rent so much that it tempts a tenant to move on. A little pain spread out over several years is more tolerable than a big spike in rent once every five years.
Something you may want to do is provide a small incentive when a new lease needs to be signed. Maybe something as simple as giving a restaurant gift card to tenants a month before a new lease with a reasonable rent increase needs to be signed. Or you can pay yourself by offering to have the rugs in the apartment shampooed or have the damaged linoleum replaced. You make the tenant happy while paying yourself by having needed maintenance and repairs performed.
Think about the time of year that the rent increase is taking affect. Being hit with a rent increase on December 1 isn't going to make a tenant happy just before the holiday season. Neither is one just before school starts if they have children. If the lease comes due at these times, consider writing into the lease that the rent increase becomes effective a month or two later. Most tenants will appreciate this.
If you have let your rents fall significantly below market value, you can't just hit your tenants with big increases all at one time. However, when a unit does become vacant, you can rent it to the next tenant at full market rate. For those signing a renewal lease, you can include two rent increases over the next year to ease the transition and still get the unit back up to market value over time.
In the long run, managing your rent increases provides you with more income, keeps stable tenants in your rentals, and maintains the market value of your investment. It's a good policy for both the landlord and the tenants.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.