In my last post, we talked about the reasons why it’s so important for landlords to keep on top of rent increases to make sure you’re getting top dollar. (Or at least close to top dollar, if your tenants are great and you want to incentivize them to stay.) Inevitably, though, any time I talk to someone about how important it is to keep their rents high, I hear excuses from the landlord about why they can’t/shouldn’t/don’t want to raise rents. Here are the four lamest excuses landlords give for not raising rents.
The Four Lamest Excuses Landlords Give for Not Raising Rents (in no particular order):
I Don’t Want to Be Mean.
Ok, I get it. I’m a people-pleaser, too. But you need to get over it. You can’t run your business by worrying too much about whether or not your tenants like you. You’re not spending Thanksgiving dinner staring at them across a dinner table. You’re keeping a roof over their head in exchange for rent payments. It’s a business transaction, not a friendship. And you’re the boss in this transaction. Don’t be a chicken!
Don’t be this guy.
You’re not being mean by raising the rents, anyway! Do shop owners apologize when they periodically have to raise their prices? Do restaurants avoid raising their prices because they don’t want to be mean? No. You’re running a business. People expect that you will raise prices over time. Meet their expectations. You don’t want them to think you’re a weirdo, right? (How’s that for playing on your insecurities in the opposite direction?)
Besides, they’re not going to hate you. Think back to when you were a renter. You probably got periodic rent increase notices from your landlord. How did you react? Did you take it as a personal affront, and vow to be enemies with the landlord until the end of time? No. You just said “aw, man” and figured out how you were going to pay for it, right? You understood that rents need to increase over time, and while it sucks, it’s just part of being a renter.
The Tenant Can’t Afford It.
This is not your problem. Truly. I know of several bleeding-heart landlords who think they are somehow obligated to cap rents at an amount that their current tenants can afford. Some will voluntarily cap themselves at the CPI rate, regardless of what rental rates are in the market. Some will even cap their rent increases lower than that, by doing an increase based on the prior year’s CPI increase, but only doing that every 2–5 years instead of every year. Aack!
You know what those tiny CPI rent increases are? Voluntary rent control. That’s crazy. You bought this very valuable asset, and took on the risk and put time and money into it. Why the heck would you cap your income from it based on CPI, when you’re not required to?
Don’t do this to yourself.
If you’re selling a used car for the $10,000 bluebook price, and someone came up and said they really liked your car but only had $5,000, would you sell them your car for half price because that’s all they could afford? (If you would do that, contact me and let me know. I’d love to offer you half price for your rental property.)
Yes, your tenant might have to move. And that stinks. I really do feel bad for tenants who have to relocate because market rents have made it impossible for them to stay. But you know what? That’s reality. There’s no guarantee that you will get to live in the place you prefer for the rest of your life, especially if you’re a renter. Why do you think so many retirees move to Arizona and Florida? It’s cheaper, that’s why. They’ve chosen to move because they can afford to live in that cheaper place. That’s how the market works. You shouldn’t keep rents too low just to make it possible for a tenant to live in fantasy land.
The Tenants Are Nice and Don’t Cause Me Any Trouble
That’s good. Those sound like tenants you might want to keep. But not at any cost. It’s not so impossible to find good tenants that you have to heavily subsidize their housing. Keep the rents just slightly below market, and you’re in good shape. If the tenants move, you will find good tenants again.
Another thing to consider is that sometimes the no-hassle tenants aren’t always as good as you think they are. I have a couple of crazy dogs, and I’ve babysat for some nightmare children before. Know what the scariest sound is? Silence. That means mischief is happening, and they don’t want you to know about it.
It’s been pretty quiet in the backyard… Oh holy hell.
The worst tenants that I inherited when I bought my building were super quiet. The landlord said he never heard them complain about anything. Well, yeah, because their rents were way too cheap and they didn’t want to rock the boat. The bathroom sink leaked badly, but if they complained about the leaking sink, they would have had to let the landlord into their unit. The landlord would have seen how filthy they were, and the tenants would have had to introduce the landlord to all of their “friends” (the armies of cockroaches and mice that were living there). Instead, the tenants kept quiet and wrapped a plastic grocery bag around the leaking pipe. (As you’d imagine, this didn’t work.)
Those quiet, trouble-free tenants were actually destroying the apartment. The bathroom cabinet was soaked and ruined. The kitchen cabinets smelled like urine and cockroach droppings inside. After I bought the place, I had to rip out the whole kitchen.
Quiet isn’t always a good thing. You’re better off getting market rents and not subsidizing the housing costs of quiet tenants who might be destroying the place.
My Expenses Aren’t Going Up, So I Don’t Have to Raise the Rents.
Oh, really? You’re the only person in the world who doesn’t have property taxes that increase every year? Utility costs don’t periodically increase for you? Things don’t break at your property? Your roof isn’t aging? Maybe you’re thinking of your mortgage, and your point is that your mortgage isn’t increasing. That’s fine. That’s how it’s supposed to work, though. You’re the building OWNER. They’re the TENANTS.
As renters, they should expect their rents to increase every year. As an owner, you bought the property. You had to come up with a down payment, find financing, commit yourself to a loan, and assume the risk of owning and managing the property. You take on the risk, so you get the reward. Your mortgage payment is supposed to stay about the same while the rents go up.
Also, your expenses may go up drastically at some point in the future. You may have moderate earthquake damage that isn’t covered by your insurance. You might need to replace the roof on the property. If you have an adjustable-rate mortgage, your interest rate might change. Even if you have a fixed-rate mortgage, you may be stuck having to refinance the property to take out equity to cover a major expense. Your expenses might go up. A lot.
If you wait until you have a big expense to make a big rent increase, the tenants won’t be sympathetic. They don’t care about your costs. They’ll feel like they’re getting screwed because the increase is so big. You’re better off raising the rent in modest annual increments, saving the extra rent money, and being better prepared for big expenses. Don’t assume that things are always going to remain perfect, and keep rents as low as possible based on that faulty assumption. Start preparing for the rainy days by keeping rents at market.
What other excuses have you heard landlords give for not raising rents? Are there any that I missed?
Here are a few real ones:
I raised rents “a lot” a few years ago.
I’m waiting until I have an updated rental agreement that I like.
Ha! Classic. Raising rents a few years back would only be relevant if you raised them to more than market rates. And who waits on an updated rental agreement before raising rents? I guess if you were planning on renewing a lease instead of month-to-month, but still. Update the rental agreement now and raise the rent, or just go month to month and raise the rent now, and update the rental agreement later. Thanks for adding to the list!
My aunt is a landlord who hasn’t raised rent in 10 years. She says it’s because she rented it to a childhood friend and she feels bad asking for more money. She’s waiting for him to leave. Of course, he never will since he’s living in a rental that’s 25% below market! So I guess the first lesson is don’t rent to friends and family.
Oh my gosh. You’re absolutely right–having a tenant well below market and hoping they’ll leave of their own accord never works. You gotta give them a reason to leave, or at least to pay higher rent. Renting to friends and family is really tough. I don’t think I’d do it unless there was literally no other option. But I’d have to clearly lay out expectations for rent increases in advance. If I felt like I was too chicken to implement rent raises, I’d probably hire a property manager and make them do it for me. That way if the friend/family member complained, I could at least blame it on the manager a little, saying they need to make their numbers look good and that’s what they recommended for a rent increase. It’s not much to hide behind, but I’d take anything I could find in that situation. Thanks for chiming in! If your aunt needs a property manager and she’s in the SoCal area, let me know. I know of a really good one.
Landlording is interesting because it puts you in the world of repeat business. It’s not a one off transaction. And you’re dealing with someone in their most intimate setting – the home. I think that’s why it makes it so difficult to increase rents on nice tenants. It’s a business your running, so you can’t think that way. But no one wants to be known as that jerk landlord.
Great point. The repeat business and the close-to-home factor are big. But there are lots of repeat businesses that raise their prices all the time. Local restaurants, dry cleaners, etc. all have to raise their prices periodically. We all expect it, right? I think tenants expect regular, reasonable price increases, too. Big increases with very little notice aren’t good, but small, regular increases are normally accepted just fine. I think it’s just the landlords who are irrationally afraid. Thanks for commenting!
That’s a great point on repeat business. That’s the primary reason that landlords are uncomfortable with raising rent – they assume they need to continue dealing with these tenants. It’s not necessarily true, but the “family friend” kind of factor is sometimes complicating the situation.
It’s not a situation I’m in, but if I ever am, I intend to make it very clear to my tenants – no matter the personal relationship – that I am interested in continuing to earn the negotiated profit. In other words, that their rent will be increasing periodically in keeping with my rising costs. The lower they keep my costs, the better for them. I don’t need to make it an increasingly profitable endeavor. I won’t be raising rents 2% annually or anything like that regardless of taxes and expenses – but if property tax goes up 2%, you can bet I’ll be looking to recoup that loss from the tenant. That’s what they pay me for!
Oooh, and don’t be afraid to pull the trigger on the eviction process either, especially in California it takes a while. In a few instances I’ve even recommended to landlords already out 3 months rent who haven’t even given the first notice to offer the tenants a few hundred dollars to leave the next day.
The property owners are horrified, but it’s just business and the eviction process is ugly.
Hi Jack, thanks for visiting and commenting! I’m sorry I didn’t see your comment until now. It got stuck in the spam filter. It shouldn’t happen again now that I’ve approved your comment once.
You’re absolutely right, you have to be quick to pull the trigger on evictions because they take so dang long. I’m shocked at landlords who wait months before even starting the eviction process. Sometimes it’s because they don’t know what to do, and some are just bleeding hearts. Those guys need property managers.
I have mixed feelings on cash-for-keys, because tenants talk to each other, and the last thing you want is to have to pay one tenant to just move out already, and then to have the other tenants try to pull the same shenanigans. We’ve had that happen before in our 22-unit building. In a smaller building it’s less likely to happen. And sometimes you just gotta do it. When clearing out my building, I had to offer them some little incentive to go or it would have cost me far more in lost rent because I had to clear out all the units at once. Have three vacant units and one in the eviction process would have cost me a small fortune.
The one excuse I find valid is that you don’t want to give them a reason to move out. Some of these apply – like if they can’t afford it, they will definitely move.
To me that doesn’t mean never raise rents, but do it consistently and gradually. A 5% raise can really hurt, 10% even more. So if you raise it 2.5% a year, every year, it will be the same result but not as shocking on the tenant.
I’m all for gradual raises rather than sudden ones. I only do sudden raises if I’m hoping they’ll move. But if the market has run up a lot and it’s been over a year since the last rent raise, 5% may be appropriate. Market rents might have a flat year and then a big move. If you raise rents 2.5% in the flat year, they’ll move because you’re above market. You might need to do a no-raise year or a very-tiny-raise year and then a bigger raise the following year.
I still don’t think the affordability excuse is valid, because yeah, if they can’t afford it, they will move. But someone who CAN afford the rent will take their place. Tenant turnover sucks, but it’s better than being handcuffed to a tenant who you feel like you can’t give rent raises to, because you’re too sympathetic toward the tenant. The former will cost you a little bit of money, but the latter will cost you a LOT of money over the years. It’s a mistake that compounds on itself, year over year.
Back when I was a landlord on my first property I had a fear of raising rent. I was living in the property while also renting it out to three friends and I didn’t want to rock the boat like you said even when property taxes and insurance were rising.
Finally after three years I raised rent by 10% which was still below market value and I got all sorts of grief from them. I told them if they weren’t happy they were happy to look around. But you know what happened? Nothing because it was still nicer and cheaper than anything they could afford. So they still stayed in there for another two years before moving out.
If I had to do it again like you said I probably would have gradually increased rent year like a real business does.
Thanks for reading and commenting, Mustard Seed! Good for you for having the guts to do such an aggressive rent increase with your friends! That must’ve been really difficult. Most people get into real trouble renting to friends and family.
When the forces of supply and demand set the prices of gasoline, the gas stations aren’t trying to be mean, they aren’t concerned if you can afford it or not, the drivers might be nice and repeat customers, and some of the gas station’s other expenses might not go up… do gas stations keep the price of gas low? Absolutely not. The market determines the price of gas, just as it determines the rent you should be charging. If you don’t have your rents at or very close to market rental rates, you are simply shooting yourself in the foot and leaving money… PROFITS on the table! This is something that many rookie, first time investors get caught up on because they are worried their tenants will leave. They won’t leave if you are charging a fair rent (which is the market rent). Do be careful of raising the rent too much too quickly however. If you have tenants who have been paying very far under market rents, you may have to gradually raise them.
You’re absolutely right. Regarding sudden raises, I don’t like to do sudden anything, because it’s shocking to the tenant. But sometimes if the rents are so far below market, you have to do something big.
We had a situation at our old property (professionally managed) where the property manager let rents stay below market for far too long. By the time we noticed, we had to do some semi-drastic raises. Some of the three-bedroom units were $300+ below market value! For those guys, we raised them about $125.
Also, we were planning to list the building for sale, so we raised rents on all the units at the same time. That’s risky, because you might get a ton of move-outs all at once, but we were so far below market and so short on time that we had to do it. Proof that we were way below market: out of 22 units, we only lost a couple of tenants because of the rent raises. And for those couple who moved, we were then able to price their units all the way up to market, which looked even better on the rent roll. Phew!
We should have been watching more closely and doing rent surveys over the years so we didn’t get ourselves into that position in the first place, though. I’m more careful about it now.
Maybe I’m just a jerk, but I don’t feel like I would have an issue. Albeit, I haven’t had a rental property to face the issue yet.
When I got a tip on this great rental property that already had this 72 year old renter, non-smoker, home was old but she liked it, the first question I asked was when does her rental agreement expire. He didn’t have a periodic increase clause, and only increased her rent 2-3% every 2-3 years. She had been there for 10 years and was renting near $650/month in an environment of $1000/ month. He felt bad because she was fixed income.
Had my financing gone through, granny would have had quite a shock. Unfortunately though, I could only come up with a 10% down payment instead of a 20%. Bank wouldn’t loan the rest — mainly because they felt I couldn’t get the rent income, primarily because the current renter was so below market rate. -_-
Not a jerk, a good business person! It is harder to do rent raises when the people are real, as opposed to hypothetical. But if you can remind yourself that you’re in this as a business, it’s still manageable.
Oh my gosh, that’s shocking about that rental house. That’s what I mean, about landlords setting unrealistic expectations for their tenants by charging too far below market for so long. Do you think the tenant was saving the difference in rent so she could have a cushion for later? No way. She was probably spending all of her money. Not that she was so rich and wasteful, just that she wasn’t living in reality, economically. Slow changes allow people to adapt. Granny might have moved in with one of her kids, or she might have picked up a side job years earlier that would help her make her rent payments, or something.
And what was about to happen? Her bleeding-heart landlord was going to sell the property and as soon as the next guy bought the property, granny was either going to have a sudden, sharp increase in rent, or she was going to have to find a place to move, stat. Sometimes people point the finger at the new guy as being the problem, but really it’s the old landlord who created the problem. He’s not going to try to sell the property at a massive discount on the condition that granny be able to stay at her artificially low rent rate. He’s going to try to get top dollar on the sale, which means the next guy needs to bring rents up to market.
It stinks that you lost that deal, but the bank might have done you a favor. The seller might have to bring his price down significantly to find a buyer, given that he created that weird rent situation that made it difficult for you to get financing.
Looking forward to reading about when you get your first rental property!
Many jurisdictions set a cap on the % increase. Mine does and all the other tenants I know expect an increase yearly. My girlfriend is still confused that her rent in a highly desirable neighborhood has not increased in the six years she’s lived there. She is easily $600 under-market. This is the only rental the owner has, but I believe he has had it for over 10 years.
It sounds like you’re in a rent-controlled area, then. The vast majority of the country actually doesn’t have rent control. It’s usually only the very densely populated areas (e.g., New York, D.C., Los Angeles, and San Francisco) that have any form of rent control for apartments or houses (mobile homes are a different story). Otherwise, it’s just a free market. For landlords in rent controlled areas, it’s critical that they raise rents annually up to the maximum, otherwise I think they lose the ability to catch up by combining the rent increases later. They would stay permanently even further and further behind. Your girlfriend is super lucky! If she’s rent controlled and already that far below market, she should plan to stay there for life. Sucks for her landlord, but if he’s been asleep at the switch, that’s what happens.
I think it’s important to look at the local market first. Rents don’t always go up in every market every year. Sometimes rents actually go down!
So, do a good analysis and make sure your units are competitively priced.
Raising rents when market rents are actually decreasing could cause vacancy and a new tenant at a lower rate than you had.