Should You Raise Rent on Lease Renewals?

Mike: Welcome back to the flipnerd.com REI Classroom where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Steve: Hey, everyone, this is Steve Rozenberg. I’m the owner and cofounder of Empire Industries Property Management Company in Houston, Texas. And today, I’m your host of the REI Classroom. Today, we’re going to talk about, should you raise your rent on tenants when the lease renewal is up.
Mike: This REI Classroom real estate lesson is sponsored by theinvestormachine.com, FlipNerd’s private investor coaching program and your blueprint to investing success.
Steve: A lot of people sometimes don’t want to rock the boat, and I understand. They’re afraid that if they, maybe, talk to the tenant about raising the rent, that they may leave. And you have to understand that you are running a business, and as your business, you have expenses that go up, and when those expenses go up, everything goes up, cost of living goes up.
So for example, if you have a rental property, and let’s say, let’s just say the rents are $1,500 a month, and let’s say the average rents go up maybe $150 over the next year, it doesn’t mean you have to raise it $150, but I can almost guarantee you, the cost of living is going to go up, meaning your insurance probably is going to go up, your taxes are going to go up, your operating expenses are going to go up. So I think it’s only fair that part of your business model is that that should go up, as well.
And, like I said, you may not want to add them as far as adding them and increasing the rent amount too much, but it should be something of added value, and you could even send them a letter explaining to them, “Look, I’ve had expenses go up, and I want to be able to perform and give you a nice house to live in. I know you like living here, and I have to cover my expenses. I don’t need to make all of my money on you, however, I do not want to lose money because this is an investment for me as well, and I am running this as a business.”
And then, more importantly, when you’re clear and open with them, there are no hidden messages, and they’re not saying, “Oh, that landlord’s mean.” You would be shocked to understand that tenants will not leave when you justify your answer and you just explain to them that this is a business, you’re running it like a business, and you are very simply trying to cover your expenses. Now, again, you don’t need to increase it a large amount, but something to help cover your costs. You could call it a nuisance increase. If they’re not happy, they’re not happy and they’re going to leave.
Now, sometimes what you do is, you can tell a tenant, “Hey, you’ve been here so long, I’m going to put ceiling fans in your house, and when I put those ceiling fans in, after that, we’re going to have to raise your rent.” So what you’ve done is, you’ve made the tenant happy, but you’ve also put a capital improvement into your property because they can’t take those ceiling fans with you.
So you’ve made your house nicer, you’ve made them happier. Those ceiling fans will probably be paid within the first month or two, and depending on the longevity of that client, the lifetime of that tenant, over the course of years and years, you’re going to be able to reap the rewards of that ceiling fan many, many times. You could paint a wall, you could shampoo their carpets for them. These are all capital improvements that you’re doing to your property, but you’re also giving good value to your tenant.
So this is Steve Rozenberg with Empire Industries, hosting the REI Classroom. Hopefully, this was helpful. You can look us up online at empireindustriesllc.com. Thank you very much.
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