Commercial

Should You Raise the Rent On Your Investment Property?

Oct 24, 2018

Because turnover can be one of a property owner's largest expenses, the decision to increase the rent amount on an investment property can be a difficult one. Since each property is unique and the rental market can vary from community to community, there is seldom a clear-cut answer. However, when it comes to rent increases, weighing a number of factors can help you arrive at an informed decision. If the decision is made to raise the rental amount, it is also important to consider the timing of the increase to avoid extended vacancies. If a rent increase is not feasible, an alternative may be to reduce the expenses associated with the property.

Maximizing Profit While Maintaining Occupancy

As the property owner, you are directly responsible for the profitability of your investment. Setting the optimal rent amount is a delicate balance between maximizing profits while maintaining occupancy. Reviewing your rental expenses, rental amounts of comparable properties, and current rental market conditions can be useful in making a decision.

Rental Expenses

In most cases, you want your rental amount to cover your expenses. Review all of the major expenses associated with your investment property and any increases in the amounts. These expenses are likely to include:

Mortgage Payment
Property Tax
Homeowner Association (HOA) Fees
Insurance Premiums
Maintenance Fees
Property Management Fees

Note the increases to these expenses and also calculate a benchmark amount that will cover all the property expenses.

Pricing of Comparable Units

The next step is to do some research on the pricing of five to ten comparable properties in the same general area. With this data, you can develop an average rental price. Make note of any amenities that would justify a boost in your pricing, such as a location near public transportation, access to a pool, or popular restaurants within walking distance. This information will not only help in determining a competitive rental amount, but can also be used in the marketing of your property.

There are a number of websites available where you can research properties for free. Keep a list of comparable properties so you can conveniently monitor changes in rent amounts quarterly or semiannually.

Current Rental Market Supply and Demand

The rental market itself — not your expenses or even comps in the area — carries the most weight in determining if you can increase your rental amount. Understanding the supply and demand in your rental property area is key to setting a competitive price.

When vacancies are low, landlords can often increase their rents without an existing tenant moving out or the property remaining empty. On the other hand, if rentals in your area are plentiful, a rent increase may lead to an extended vacancy. In some instances, discounts or a few weeks of free rent may need to be offered to secure a new tenant.

If you prefer not to do this research on your own, a more thorough analysis of the rental market in your area can be purchased from a number of websites.

Implementing a Rent Increase

If you decide to move forward with a rent increase, there are a few common times you may want to consider implementing the change:

Lease Renewal
New Tenant Lease
Following Property Improvements

Lease Renewal

A slight increase is usually expected by most tenants when signing another lease. However, a substantial increase may be met with resistance. After checking other rentals in the area, your tenant may realize that the increase is competitive and choose to stay. If not, it's beneficial to start publicizing the vacancy as soon as possible.

There are situations where you may choose to delay the increase for another year. A long-term tenant who pays on time may be of more value than a slight bump in monthly income. Or, if an unforeseen event caused a major inconvenience for your tenant, you may choose to forgo an increase.

Whenever you decide to increase the rent on existing tenants, be sure you understand the laws of your state, especially if the property is rent controlled or increases are limited by statute. Notifying your tenants well before the lease ends not only meets legal requirements but can also give you time to market the property if the tenant decides not to renew.

New Tenant Lease

Often the best time to adjust the rental amount is at the beginning of a lease with a new tenant. Establishing a competitive amount at this time can help minimize the need for any significant increases moving forward.

After Property Improvements

Regular maintenance is important to tenant retention and can help your property to be viewed in a positive light, but it is seldom accepted as a reason for higher rent. In contrast, improvements and upgrades can justify a rent increase to an existing tenant or make your property more appealing to potential tenants. Keep in mind that curb appeal is important, but appliances, modern fixtures, and new flooring are also valued.

Reducing Expenses When a Rent Increase Isn't Feasible

Sometimes a rent increase may not be feasible based on market conditions. As an alternative, you may be able to reduce expenses as a means to increase your return on your investment property. Take a look at your major expenses to see if there are opportunities to reduce the amounts.

Your mortgage payment and property tax assessment are two major expenses. Although it's unlikely you can reduce the amount of property tax you pay, refinancing your existing loan could potentially reduce your monthly mortgage payment through a lower interest rate or extended term. HOA fees often aren't subject to negotiation, but you may be able to reduce your insurance premiums by shopping around for a better price.

Preventive maintenance can save you money. Replacing furnace filters, cleaning off A/C compressors, and clearing rain gutters can prevent large outlays of money for HVAC and foundation repairs. In addition, regular inspections can find small problems before they become major expenses.

If you use a management company, a clear understanding of the services they provide along with their fee structure can save you money. By assessing their overall performance regularly, you can determine if the services they provide are worth the fees you pay. As the property owner, you can negotiate better terms or consider another firm with lower fees.

A rental increase is never a risk-free proposition, but it is a means to maximizing your return on investment. The potential for increased profits should always be balanced with the benefits of consistent occupancy. An informed decision can be made once you have a clear picture of your expenses, take the time to review other comparable properties, and examine the supply and demand of the current rental market.

For more information on Axos Bank and Investment Property Lending, where we deliver flexible and economical financing programs in multifamily markets, please contact us by phone at 1-800-656-LOAN today.