“Should I raise my rents? How much and how often should I raise them?”
These are frequent questions in the world of real estate investment. And that kind of makes sense. On the one hand, property owners know that the numbers matter ‒ you want the rent that gives you the best return on your investment. Then again, this issue is a hassle for a lot of folks. If you and your tenants are happy, why rock the boat? And how do you raise your rent without losing good tenants or pricing yourself out of the market?
Notice there are two things going on here. First, there’s the issue of strategy and tactics. That is, how do you figure out what a reasonable and profitable rental rate is and how much it should increase over time? This also includes the techniques of how you interact with your tenants.
Secondly, though, there’s the issue of your mindset and emotional state about all this. If your logical brain is telling you to raise your rental rate this year, but your feelings tell you that isn’t “fair” or you’re afraid you’ll lose “those wonderful tenants” if you increase their rent… then you’re inwardly conflicted. You’re working at cross purposes… with yourself!
So today we’ll focus more on the mindset of raising your rents. Once you’ve mastered that, the details get a lot easier…
This Is a Business
The first thing to keep in mind when approaching the issue of rental rates is: How much you charge for rent is a business decision. Your thinking goes something like this: “What I charge for rent is a critical part of the cash flow equation for this investment property that I own.”
That doesn’t mean you’re some “evil landlord” character out of a Hollywood movie script or that you don’t value your tenants. Business is not opposed to relationships. The issue what kind of relationship you have with your tenants. And the bottom line is: you are a service provider for your clients, who in this case are your tenants.
You own the property, and they live there subject to the terms laid out in the contract (the lease agreement) that you both signed. A major part of that contractual agreement is that they pay you, the owner, a given amount of money each month. You’re not running a charity ‒ you’re running an investment business.
You may really like your tenants, and that’s fine. But if you want to view them primarily as friends, then admit to yourself that approaching it that way is not a business-oriented approach. You probably shouldn’t rent your property to people you feel that way about.
Expectations Are Everything
Whatever you charge for rent, and however often you raise the figure, you need to have realistic expectations. And the same goes for your tenants.
If you think you’ll buy a property, rent to someone at price X, and never look at that rental amount again, that’s not realistic. While this is largely a plug-and-play kind of investment (especially if you bring a property management company into the equation ‒ see below), it’s not completely hands-off.
You do need to watch your numbers. You do need to respond to the market. And the market will probably indicate sooner or later that you need to raise your rates to offset inflation and remain competitive. (If your rates are too low, you’ll attract the wrong kind of tenant!) For that matter, even when working with a property management company, you’ll want to stay in touch with them, asking them questions and helping them help you.
So when you think about what you charge for rent, you should understand that it’s an ongoing process.
You also want your tenants to have realistic expectations. You can screen your tenants to help make sure they’re the kind of people who know that rental rates are one of those costs of living that tend to go up over time. You can politely and simply explain to them that this is just part of the process of renting a home in your particular market.
You can also set the tone and refuse to be drawn into an overly “friendly” or non-professional relationship with them that would potentially make it more awkward for you when it’s time to raise their rent. (See section above.)
In short, just as you have to manage your own expectations, you can do the same with your tenants. It’s up to you.
Delegation Can Be a Good Thing
I’ve talked about the benefits of working with a solid property management company before (see here, for example), and I don’t want to go too deeply into this now. But it’s worth remembering that delegation can be a very good thing in business ‒ and investment.
Delegating things that aren’t at the core of what you do frees you up to focus on your main strengths and the primary elements of your business. For you as an investor, it’s essential that you build up your net worth and deal flow, so you can keep leveraging your assets and building up your investment portfolio.
What you don’t want to happen is for you to get caught up in all the details of the day-to-day management of your properties. And one great way to avoid that trap is to delegate such things to a property management company. Those details are their core competency!
In terms of rents, they know the market very well and keep their finger on the pulse of what rental rates are doing. When you need a new tenant, they know what a competitive rental rate is. They can find out in minutes what may take you weeks to determine.
(Notice also that it’s easier to have a healthy distance from your tenants when your property management company acts as a buffer when it comes to setting, collecting, and raising your rent.)
That one decision to delegate, if you’re in the position to do so, can pay big dividends in terms of ensuring you’re charging the best rental rates ‒ and not stressing out about it.
Clear Thinking Makes for Peace of Mind
This issue of when and how much to raise your rent doesn’t have to be a headache, emotionally or technically. Remember that your relationship with your tenants is a business relationship, set reasonable expectations with yourself and your tenants about how this works… and at least consider the help a property management company can bring when you let them help you with these issues.
Ready to experience the peace of mind that comes from investing in real estate the right way? Give us a call at (801) 990-5109 or schedule your free appointment here to build a personalized Wealth Plan.
