SS236: How To Raise Rents Without Losing Tenants

SS236: How To Raise Rents Without Losing Tenants

Raising rent doesn’t have to mean losing good tenants. In this Strategy Saturday episode, Charles Carillo shares how landlords can increase rent strategically—by addressing maintenance, using local comps, offering concessions, and communicating early. Avoid costly turnover and boost cash flow by raising rent the right way.

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Talking Points:

  • One of the most challenging aspects of being a landlord is raising rent. Minor rent increases of 1% – 3%, maybe even up to 5%, aren’t that difficult to achieve since most tenants expect their rent to increase similar to their other expenses every year. Where this gets tricky is when you have a property or unit that has severely under-market rents. This commonly occurs when you purchase a property from a mom-and-pop landlord that has owned it for 10 – 15+ years. They have little to no mortgage on the property and cashflow with minimal issues, and don’t want additional hassles involved with renovating and finding new tenants. 
  • One piece of advice I received from my father was that before requesting rent increases, make sure to address all deferred maintenance. If tenants see you and your team at your property fixing it and improving it, they are more likely to agree to your rent increase. I know that I am not agreeing to a rent increase as a tenant if issues have not been addressed at the property I am renting.
  • One piece of advice I received from one of my first property managers was always to raise rents every year, even if it’s only by 1%-2%. There are two main reasons for this. Firstly, by raising rents by just one additional percent annually, you dramatically increase your property’s returns. Secondly, it helps ensure you will not get behind inflation. Many small landlords were not raising rents in the run-up to COVID, only to find out in 2021 and 2022 that inflation was now turning their positive cash-flowing asset into a negative cash-flowing property. These landlords were now faced with the truth that they needed to raise rents by 20% or more to begin to cover the dramatic increases in expenses. So, raise the rent each year, no matter how minimal it is.
  • If you are raising rents 10% or more, I would suggest a more strategic approach to increasing your tenants’ rent. I would only undertake all of this work if you genuinely want to retain the tenant. For less-than-ideal tenants, I might not go through all of the legwork. Additionally, I am willing to keep great tenants and not achieve market rate rents. My goal in this process is to get rents close to market, but also to retain the tenant.
    • First, gather several actual rent comparables. Don’t just get one comparable and present that as what market rent is; find actual comparables in your neighborhood for properties in similar condition and of a similar vintage. If you are renting a unit for $1,000 and one neighbor is trying to rent a unit for $1,800, and you bring that to your tenant, but they look and find many units for $1,400 out there, it now looks like you are trying to take advantage. 
    • Secondly, compile these rental listings, and I would put together a letter to the tenant (at least 60 days before renewal). Yes, I would send a letter for a significant increase with all of the documentation and printouts so they can review it when they are free. Explaining that over the past 4 years, for example, you have kept the rent under market while expenses have increased, and now you are required to increase the rent from $1,000 to $1,300, which is still $100 under market. I would also include any local articles on the cost of property ownership increasing in their community. Maybe taxes and water have increased; send them articles about this so they can understand fully why you are raising their rent. The goal is not to achieve full market rent but to offset rising costs.
    • A couple of different methods of lessening the blow. Offer to fix or replace something for the tenant. Perhaps they have an old stove that requires repairs. You could offer to replace that stove if they renew. Have they mentioned anything else that might be outdated and could be addressed? How are the common areas? Maybe there is an issue that no one has complained about but needs repair. Remember that making updates and raising rents is a win-win for tenants and landlords. Any repair you make also increases the value of your property.
    • One additional strategy for structuring the rent increase is by raising rent to market and then offering a 1-year rent discount if they renew. For example, you raise rents fully to the market rate in this example, $1,400, but offer a $100-$150 rent concession for the first year. You have now achieved market rents, and you know if they renew next year, the concession will burn off, and you will be receiving full market rent for the unit.
  • For more information on how to raise rents, check out episode SS39.
  • One additional point to make is how expensive the cost of tenant turnover has become. Even minor rental turns can cost $5,000 these days, with major unit turns costing a multiple of that. That is why my goal is always to try to keep good tenants even with (slightly) below-market rent.
  • If you purchase a property with low rents, you need to address deferred maintenance and then start rent increases immediately. The longer you avoid it, the harder it will be. Always understand your state and local tenant laws, and let’s also remember that you are not negotiating the sale of an old used car but negotiating a rent increase on someone’s home. This is a very personal and emotional matter. State the facts, present your offer, consider their feedback, and remain compassionate.

Transcript:

Charles:
Most landlords are terrified to raise rents, but the real danger is not raising them at all. And I get it, rent increases can feel risky. But after working firsthand with hundreds of tenants over the years, I’ve noticed what I did that made the process successful and what was less effective. Welcome to Strategy Saturday. I’m Charles Carillo. And today’s episode we’re discussing how to raise rents without losing your tenants. If you’ve ever bought a building with under market rents or hesitate to increase rent during inflationary times, this episode’s for you. So let’s get started. One of the most challenging aspects of being a landlord is raising rent. Minor rent increases of just 1% to 3%, maybe even up to 5%, aren’t that difficult to achieve since most tenants expect their rent to increase similar to their other expenses every year. Now, where this gets tricky is when you have a property or unit that has severely under market rents.

Charles:
This commonly occurs when you purchase a property from a mom and pop landlord that has owned it for 10 to 15 plus years. They have little to no mortgage on the property and cash flow with minimal issues, and they don’t wanna disturb that. They don’t want additional hassles involved with renovating and finding new tenants either. Now, one piece of advice I received from my father years back was that before requesting rent increases, make sure to address all deferred maintenance. If tenants see you and your team at your property fixing and improving it, they’re more likely to agree to your rent increase. I know that I am not agreeing to a rent increase of the tenant if issues have not been addressed at the property I’m renting. Now, one piece of advice I received, one of my first property managers was always to raise rents every year, even if it’s only 1% to 2%, and there are two main reasons for this.

Charles:
Firstly, by raising rents by just one additional percent annually, you dramatically increase your property’s returns and your property’s values. Secondly, it helps ensure you will not get behind inflation. Many small landlords were not raising rents in the run up to COVID only to find out in 2021 and 2022 that inflation was now turning their positive cash flowing asset into a negative cash flowing property. And these landlords were now faced with the truth that they need to raise rents by 20% or more to begin to cover the dramatic increases and the expenses. So raised rents each year, no matter how minimal it is, if you’re raising rents 10% or more, I would suggest a more strategic approach to increasing your tenant’s rent. I would only undertake all this work if you genuinely want to retain the tenant for less than ideal tenants. I might not go through all the legwork.

Charles:
Additionally, I am willing to keep great tenants and not achieve full market rate rents. My goal in this process is to keep rents close to market, but also to retain the tenant first, gather several actual rent comparables. Don’t just get one comparable and present that as what the market is. Find actual comparables in your neighborhood, four properties in similar condition and of similar vintage. Now, if you’re renting a unit for a thousand dollars and one neighbor is trying to rent the unit for 1800 and you bring that to your tenant, but they look online, they find many units for 1400 out there, it now looks like you’re trying to take advantage of the situation. Secondly, compile these rental listings and I would put together a letter to the tenant at least 60 days before renewal. Yes, I would send a letter for significant increase with all the documentation and printouts so they can review it when they’re free and send it out at least 60 days in advance, especially if you just bought a property because the tenants in the back of their mind, they’re thinking after you’ve purchased it, what’s gonna happen with my rent when that renewal happens?

Charles:
So no more surprises. Send it out to them. Tell ’em what you’re thinking. Tell ’em what the market is. And if you’ve been doing work on the property before that, then you can show that to them. Explain that over the past four years, for example, you’ve kept the rent under market while expenses have increased and now you’re required to increase the rent from say, a thousand dollars to 1300, which is still $100 under market. I would also include any local articles on the cost of the property ownership increasing in their community. ’cause they probably don’t follow it if they’re tenants, unless they’re trying to buy a property. Maybe taxes and water have increased. Send ’em these articles. Make sure their local articles, don’t send ’em an article from USA today, but how they can fully understand why you are raising their rent. And the cost is not to achieve full market rent.

Charles:
If you can, that’s great, but to really offset the rising cost and get yourself as close to market as possible while retaining that tenant. Now, a couple of different markets offer to fix or replace something for the tenant. Perhaps they have an old stove that requires repairs. You could offer to replace that stove if they renew. Have they mentioned anything else that might be outdated or could be addressed or was starting to show signs of wear or issues? How are the common areas? Maybe there is an issue that no one has complained about, but needs repair. Remember that making updates and raising rents is a win-win for tenants and landlord. And any repair you make also increases the value of your property. Now, one additional strategy for structuring the rent increase is by raising rent to market and then offering a one year rent discount if they renew.

Charles:
So pretty much you’re giving them almost like a concession on renewal, but for example, you raise rent a fully to market rate. In this example, say $1,400, but offer a hundred to $150 rent concession for the first year. Now, you’ve now achieved market rents on paper, and you know that if they renew next year, the concession will burn off and you’ll be receiving full market rent from there on. So pretty much you’ve done two things. You’ve raised rents for this year, and now you’ve already set for raising rents for next year as well. Now for more information on how to raise rents, check out episode SS three nine. That’s episode SS three nine. Now, one additional point to make is how expensive the cost of tenant turnover has become. And this is why we’re not pushing for full market rentals all the time. We’re really just trying to close that gap.

Charles:
Even minor rental turns can cost $5,000. These days, we’re seeing it as well over $5,000 for between lost rent and everything else with major unit turns costing multiples of them. That is why the goal is always to try to keep good tenants even with slightly below market rents. If you purchase a property with low rents, you need to address deferred maintenance and then start rental increases immediately. The longer you avoid it, the harder it will be. Always understand your state and local tenant laws, and let’s also remember that you are not negotiating the sale of an old used car, but negotiating a rent increase on someone’s home. And this is always a very personal and emotional matter. So state the facts, present your offer, consider feedback and remain compassionate. Also, give them enough time. So if you have 60 days that they have to tell you to leave, tell them 90, 120 days out.

Charles:
This way, they have time if they wanna find a new property, but then you also have time to work with ’em. They don’t have like a weekend if you drop it on their, you know, you send it to ’em and they have a weekend to make the decision. Now they have time to speak with their other roommates, their spouse, whatever it might be, and they can figure out what they want to do and they might call you back and say, Hey, this little too high. Can you do something lower? Or whatever it might be. And you can make that decision as you want, but I’d rather have them speaking to you before they start pulling off Zillow and start looking for another apartment. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS236: How To Raise Rents Without Losing Tenants

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