HOW MUCH and WHEN do you RAISE RENT?
By Mike Hurney, Director of MassRealEstate.net
There’s a matter of position. You as a Landlord want to be perceived as Responsive, Fair and Honest, otherwise simple things won’t get resolved such as what’s “Wear and Tear” and what needs to be charged back to a Tenant. And you could even lose a good Tenant.
If you’re a Tenant, you never want the rent to increase, “It’s way too high already!”
And of course if you’re the Landlord “It’s been below market for too long, I’ve got to catch up!”
We need to get somewhere in between. As Successful Landlords say I didn’t get into this business to get a Job, I got into it to make Money!
Number 1 you’ve got to determine if there are any Rent Control Laws? Rent Control which limited or prevented any increase was originally instituted after the second World War when there was a housing crisis. Fortunately Massachusetts voters ended Rent Control it in 1994 after some Tenants in Boston, Cambridge & Brookline had enjoyed it for 30 years.
It’s more likely you would have Tenants on Section 8 than rent control. Section 8 is the Massachusetts version of Section 8 (Housing choice Voucher) program administered through local PHAs (Public Housing Authorities) and funded by HUD (U.S. Department of Housing and Urban Development) The Vouchers are mainly based on the applicants family income and nationality. There are strict eligibility requirements based on need and income. The PHA calculates the maximum housing allowance and the families contribution. It’s unlikely you’ll be able to raise the rent on families that have a voucher for your unit since it is set by the PHA and monitored by HUD.
Owners and especially Non-Owner occupied properties have two reasons to keep their rents current with market rates. First it helps Cashflow (Rental Income minus Expenses) and Secondly it’s an indicator of value that Buyers use to justify a purchase price. GRM (Gross Rent Multiplier) and DSR (Debt Service Ratio) are two commonly used by Real Estate Investors.
Here are some tips and guidelines for figuring How much and When to raise rents.
- With annual leases, just include an increase at renewal time. Personally I give a 60 day notice not just the 30 days required by Massachusetts law.
- Tenant-at-Will (month to month) I give the same notice of 60 days on the Anniversary. I like the TAW because we’re on the same footing, Landlords and Tenants that is. With an Annual Lease in Massachusetts a Tenant only has to give a 30 day notice for an action (such as leaving) but a Landlord has to wait until the term of the Lease for an action (such as an increase or notice to quit without cause). TAW we each can give the 30 day notice.
- Your City or State may have different requirements for notice, Check that out first!
- When raising rents for any unit in a building make sure you raise the rent for everyone with the same amenities the same amount. It takes Tenants about 3 minutes to find out what everyone else is paying;-) and you do not want to be on the wrong end of a discrimination suit which can take years. Incidentally the reporting requirement for HUD is 365 days, Massachusetts it is 360 days. Most Discrimination settlements are heavily weighted with Punitive damages against a Landlord.
- Many Landlords have a policy of increasing the rent every year, even if it’s only a small amount, that way Tenants are used to the increases. Often new Landlords will take pity on a Tenant for some perceived reason and not raise rents. However once they need to raise the rent and it is a significant increase, look out. As the Irish say “No Good Deed Goes Unpunished!”
- You could link your rent to the Consumer Price Index. For 2015 Housing, all cities in the US it was 3.2% but rents have skyrocketed in Metro Boston for 2015 with a severe shortage of units.
- Some of my fellow Landlords will use Rentmetrics or RentoMeter to find local market rents but I like to check the competition using CraigsList. It’s a little more work but I believe I’m looking at the same units that my potential Tenants see.
- Find the pain point, who will leave for $20 vs $50/month increase You know it costs at least a months rent to do over and rent a unit. Then there can be a period of vacancy.
- If this is tough for you, hire a PM (Property Manager). Hire directly not the newest broker in a franchise who’s chasing FSBOs and Expired Listings. They’re answering two Bosses: The franchise Broker/Owner and You. Who do you think wins?
This information is for informational purposes only and cannot be substituted for Legal or Financial advice from licensed experts. When you consult these experts, Attorneys, Accountants and Tax Experts at least you know who to see if there is trouble! Mike Hurney is also the author and Coach of the Step by Step Course “How to Become a Real Estate Investor in 12 Easy Lessons” you can reach him at [email protected]
Copyright © 2016 Can be reprinted only in its’ entirety.
PS There are 7 Protected Classes that HUD prohibits any housing or Rental Discrimination against, Massachusetts has 8 more, New Hampshire has 4 more. As a Landlord, do you know