Year End: Make Plans to Renew Your Leases and Increase Rents
At the end of the year, I like to go over the rents and lease renewal dates for the coming year. I consider the relative strength or weakness in the rental market, rate of inflation, and planned improvements to the property when deciding how much to raise rents when it comes time to renew each lease agreement.
Setting the Expectation for Rent Increase
Since “expectations” are a key component to all relationships, I want to establish an expectation with my residents that rents will increase each year. If the rental market and/or economy is particularly weak, I may raise rents as little as $5 or $10; but an increase will come. If the economy is doing well and the rental market is strong, an increase of 8% to 10% may be warranted.
Don’t Let the Property Value Suffer
If a tenant is staying in a property over a long period of time, the concept of compound interest applies similarly to rental rates. I have had clients come into the office and present me with a rent roll where current rents are as much as 50% below the current market. When I inquire, the client responds, “They are such nice tenants, I would never raise their rent!” This is detrimental to the property and to the owner. The property value suffers when rents are far below market. If the rent is $100 less per month than the market rate, the landlord is foregoing $1,200 per year in revenue. If rents would normally increase 3% per year, in 5 short years, the landlord would have foregone $6,500 per unit. If properties sell for 8 times gross annual rent, the landlord is giving up more than $11,000 in property value.
Increasing the Rent Is Normal
Everything goes up, right? We are creatures of habit. We don’t change gas stations everytime the price goes up. We don’t go to a different grocery store every time the price of food goes up. Why would it be any different that the price of rent would not go up; given general inflation in the economy?
Landlords are encouraged to review their rental rates once each year and make an informed, strategic decision about how to price rents in the coming year, considering the state of the economy, inflation, and the state of the rental market.
Ben Frederick Realty
Ben Frederick III, CCIM, a real estate broker specializing in Apartment Properties in Baltimore, served on the Board of the Property Owners Association of Greater Baltimore during the time that the Lead Poisoning Prevention Program was negotiated and passed into law. Mr. Frederick was an early adopter of practices to keep children safe while at the same time reducing liability for landlords. Mr. Frederick has expertise in guiding landlords in the area of best practices for compliance with the Lead Poisoning Prevention Program.