22 Jul Pros and Cons of Increasing Rent at Lease Renewal
There comes a time in every lease term where both the landlord and the tenant tend to become a bit uneasy. That time is near the end of the lease term when a landlord wonders (and often hopes) that their tenant will stay and keep producing revenue to him, and when a tenant wonders (and always hopes) that the rent will not increase if they renew their lease. There are lots of arguments for both sides, and the following is meant to be a guideline for navigating this important choice. It should also be noted that a fairly standard increase in rent across the industry lands in the realm of 3% of the rental rate. Smart landlords build this incremental annual increase into their leases so it is agreed upon at the beginning and causes no friction between them and the tenant when renewal time comes.
From the landlord’s perspective, leasing a property is often viewed as a running a business with decisions to be made based on income and expense alone. In that line of thought, maximizing revenue is priority number one. However, this point in a lease term has some potential pit falls that may at first seem like they are generating more revenue, but in the big picture can cost more than they provide as a benefit. For example, if the rent is $1000/mo and the landlord is proposing a $30/mo increase to their tenant, that means the landlord stands to make an extra $360 in revenue over the course of the next year than they have in the current lease term. That seems like a modest amount to ask a tenant to pay to help offset the cost of living, taxes, etc that come along with owning a property. But, if you have not disclosed at the beginning of the lease term that an increase is coming at renewal, you may find that your tenant is not receptive to an increase, and more often than not they choose to move out. As a Property Manager, the leasing fee that is often charged is equivalent to the first month’s rent when a new tenant is located. Now all of a sudden your $360/year increase just became a $1000 loss (with potential for more with any vacancy).
A tenant’s argument is that they are a “good tenant” – meaning they take care of the home, pay their rent on time, notify the Property Manager of any maintenance issues so they can be addressed promptly before becoming larger, more expensive issues, etc. And so sometimes they would even argue the opposite of an increase should happen! They will want a discount on their monthly rent when it comes time to renew! To them, it is not a business transaction so much as a home that they use to provide shelter to their families. And when you have emotions tied to something, your attitude towards the “threat” of a rent increase can cause real friction between landlord and tenant.
Another argument a landlord can make is that the cost to move in this example of $1000/mo with a $30/mo increase ($360 annually) far exceeds what the increased rent would be, and would have to be paid all in one lump sum as opposed to being paid in monthly increments. Again, this is a view from someone looking at leasing a home as running a business. But a tenant who is emotionally tied to the “transaction,” may be willing to overlook the added expense of moving because they don’t feel that it is “right.”
Finally, the last things to consider regarding whether to increase rent or not are intangible items with your tenant. Provided they are a “good tenant” as described above, what value do you assign to that? As a Property Manager, I attribute quite a bit to it. Sure you can thoroughly screen and find someone else that looks like they will be a good tenant, but this tenant you have now is a known quantity. They are not destroying the property, they pay their rent on time, they tell you about maintenance issues. A new tenant is essentially some kind of gamble every time, regardless of how much screening you do.
So, to summarize, it is important to take many factors, both monetary and intangible, into account when deciding if you should increase the rent on a tenant’s lease renewal. The proactive way to approach this situation is to make it part of your standard lease and remove the shock and worry when those last couple months of the lease term come and that tough conversation must happen. In this manner, both landlord and tenant have agreed on the expectations up front, and the tough conversation becomes much easier. Understanding how both sides of the equation view the problem goes a long way into finding reasonable middle ground.