Rents have risen like crazy in 2021. They were up 9.3% nationally for single-family homes from August 2020 to August 2021, according to CoreLogic. This has been the biggest year-over-year increase in over 16 years. And more of the same is expected for 2022. So should you raise your rent to reflect these massive increases?
Should you increase rent?
The big advantage mom-and-pop landlords have over institutional investors is that we can be flexible. Just as one-size-fits-all medicine isn't typically as good as individualized care, a one-size-fits-all approach to rent increases isn't usually the best way of doing business.
Instead of raising rents across the board just because you might be able to, a better approach is to first consider your particular circumstances. This will help you determine how much you should increase rent or even if you should increase it at all. Getting top dollar and making as much as possible is certainly a goal, but it's not the only goal landlords should have. Never forget the biggest profit killer is vacancy. Before you raise the rent, you would be wise to consider the following.
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1. What you're currently charging
A landlord's fixed expenses typically go up each year: property taxes, insurance, etc. So that you aren't taking a pay cut, it's good practice to include a rent increase at each lease renewal period. (This assumes you aren't subject to rent control laws, which would take precedence over what you can or can't do.)
It's usually best to raise the rent about 2% to 5% each year. So if rent were $1,500 a month, the increase would be somewhere between $30 and $75 more per month -- probably not enough to cause anyone to move. Any more than that and you might lose a tenant.
2. Current market-rate rents
If you haven't been raising the rent and you find that you're charging well below market rate, you probably should consider a tenant rent increase. You most likely won't be able to spring a massive rent increase on a tenant without having them leave, though. A better course of action would probably be to gradually raise the rent at each renewal period until you're receiving closer to market rate.
3. Whether your property warrants top dollar
If you haven't done a walk-through of your property in some time, now's the time to schedule one. You might find that you haven't been keeping up with maintenance or that your rental is dated compared with your competition. If so, you should be prepared to spend what could amount to a substantial amount of money to bring your rental up to the condition that would warrant market-rate rent.
Run the numbers to determine which option makes more sense: keeping a reliable tenant who pays less than market rate or sinking some money into the unit to modernize it, and then, of course, being prepared to market the unit and screen tenants.
4. What sort of tenants you have
Having long-term tenants who pay the rent on time every month and keep the place in good condition is worth something (a lot if you ask me). If you're making money on the property, even though not as much as you could in this inflated market, you have some thinking to do.
If you raise the rent substantially, such as around 10% or more, you risk losing steady tenants you've been doing business with for years. This might be a risk worth taking. A lot depends on your rental unit. A highly rentable property would probably warrant the rent increase. If your property is in good condition and in a desirable area that's close to amenities with good schools, low crime, and little competition, you should probably be getting top dollar. A property like this would likely not stay vacant too long.
Rental types that experienced the biggest increases
Although rents increased across the board, higher-priced rentals increased more than others -- 10.5% from August 2020 to August 2021. These are rentals that cost more than 125% of the median for the region.
The biggest increase of all was detached versus attached rentals. Detached rentals, or single-family homes, increased 11.7% from August 2020 to August 2021.
So if you have a higher-than-median-priced (for your area) detached single-family home, it looks like you might be getting a pay raise of sorts.
