Your Costs Go Up, Does the Rent Have to Follow?

Insurance goes up. Property taxes increase. The plumber costs more than he did two years ago. Your association raises its maintenance fees, and the price of replacing an appliance seems to climb every time you need one. For rental housing providers, particularly those who own just one or two properties, it is tempting to look at those rising expenses and immediately think, “I need to raise the rent.” Sometimes you do. But not always.

One of the realities of owning rental property is that not every increase in the cost of ownership can be passed along to the resident. Rent is ultimately determined by what someone is willing to pay for your particular home in the current market. Your expenses may help determine what you need the property to earn, but they do not determine what the market will bear.

Before increasing rent, take a fresh look at the rental market around you. What are comparable homes actually renting for? More importantly, how quickly are they renting? Those are not necessarily the same question. If similar properties are advertised at $3,000 but are sitting vacant for weeks, that tells you something very different than comparable properties renting quickly at the same price. Asking rent is only part of the picture. Days on market, concessions, available inventory and the number of competing rentals matter too. This becomes especially important when the rental market softens. Increasing the rent simply because your insurance premium increased does not mean a resident will be willing to pay it.

Suppose you have a good resident paying $2,800 per month and you believe you could get $2,900. That additional $100 sounds like $1,200 in additional annual income.

But what happens if the resident decides to move? One month of vacancy costs you $2,900 in lost rent before you spend anything preparing the property for the next resident. There may be cleaning, advertising, repairs, your own time showing the property and the uncertainty that comes with bringing someone new into the home.

At an additional $100 per month, it would take 29 months just to recover one month of lost $2,900 rent.

That does not mean you should never raise rent. It means the decision deserves more thought than simply calculating how much your expenses increased.

There is tremendous value in a good paying resident. A resident who pays on time, communicates with you, takes reasonable care of the property and wants to stay has value. That value does not always appear neatly on a spreadsheet. Turnover creates costs and uncertainty. A new resident may be wonderful, but you do not know that yet. When deciding whether to increase rent, the value of an existing tenancy should be part of the calculation. Sometimes keeping rent slightly below the top of the market is an intentional business decision. You may be giving up $75 or $100 a month in potential income, but in exchange you may have greater stability and fewer turnover expenses. That can be a very good trade.

There is another side to this conversation. Housing providers who avoid reasonable increases for many years can eventually find themselves significantly below market while their operating expenses continue to rise. Then the adjustment becomes much harder. A modest increase that keeps rent reasonably aligned with the market may be easier for both parties to absorb than waiting several years and discovering that a substantial adjustment is necessary. This is why rent decisions should be reviewed regularly, even when you ultimately decide not to make a change. Look at your expenses. Look at comparable rentals. Consider the condition and amenities of your property. Then look at the tenancy itself.

The answer may be to increase the rent. It may be to make a smaller adjustment than you originally planned. It may also be to leave the rent exactly where it is for another year.

For small rental housing providers, rising expenses are real. Property taxes, insurance, maintenance and repair costs do not disappear simply because the rental market is soft. But neither does market reality. Owning rental property means balancing both. Practical Tip: The goal should not necessarily be to collect the highest possible rent every month. The better goal is to operate a financially sustainable rental property over time.

Sometimes that means raising the rent. Sometimes it means recognizing that keeping a good resident at a slightly lower rent is worth more than chasing another $100 a month. Before sending that rent increase notice, do the math. The most profitable rent is not always the highest rent you think you can charge. Sometimes it is the rent that keeps a good resident in the home and your property occupied, and your resident stable.