When To Raise Your Tenant's Rent
Rental income is one of the most secure and steady ways that investors can make money from their ownership of real property. Yet the decision of how much rent to charge isn't always straightforward.
Rents that are lower than the market rate can encourage steady tenants to stay in place and consequently cut the costs of tenant turnover, but leave revenue on the table. On the other hand, rents that are higher than the market rate can boost rental income, but result in tenant move-outs and associated costs to find and screen new tenants and ready the property for their occupancy.
Owners who want to raise rents need to find out how much rent is being charged for similar houses in the neighborhood that compete with the owner's property when it comes to attracting and keeping good-quality tenants.
Information about market rents can be found in newspaper advertisements and on rental housing Web sites, but more reliable data comes from direct research. Drive around the neighborhood where the property is located and look for similar properties that are being advertised as rentals. If the door is open, go ahead and take a look inside.
Call the owner or manager, identify yourself as a local property owner or prospective buyer in the area and ask for information about the rental property. How big is it? How many bedrooms, bathrooms and other rooms does it contain? Does it have any special features like a garage or backyard bonus room? How much is the monthly rent? What are the move-in deposit requirements? How long is the lease term? Are any move-in concessions (e.g., one month of free rent) being offered to a new tenant?
Organize the information about the for-rent properties into a chart that lists the square footage or numbers of bedrooms and bathrooms and special features for each property along with the monthly asking rent. This chart should suggest the optimum rent that could be charged for each house in that market.
The difference between the market rent and the actual rent a tenant is paying is called the "loss-to-lease" in industry jargon. To understand this term, suppose a tenant leased a house for $1,000 per month for one year. Suppose further that six months later market research indicated the house could be rented for $1,100 per month. The loss-to-lease would be $100 per month until the end of the lease. The loss-to-lease suggests whether the rent can be raised when the lease is renewed or changed to a month-to-month tenancy and if so, by how much.
The opportunity to raise the rent also depends on the likelihood that the tenant may move out if the rent is increased and the balance between the supply of and demand for rental houses in the area. Demand depends on employment, seasonality, school schedules, demographics, ownership housing costs and other factors. If the risk of losing the tenant is high and the demand for rentals is low, the opportunity to increase the rent is limited. In the opposite situation, the opportunity is much better.
Cosmetic enhancements to the residence or new features like a dishwasher or carport also can pave the way to higher rents as long as the property doesn't become substantially over-improved compared with other rental houses in the area. Fresh paint, new landscaping and new carpets are some examples of upgrades that can make a rental house more attractive to tenants who might be able and willing to pay more rent to live there.
Copyright 2006. Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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