When a lease is two months away from expiring, you should start thinking about whether or not you should to raise the rent. Deciding how much the new rent should be is always a hard call to make. Making this decision is walking a fine line between leaving money on the table and raising the rent so much that the tenant leaves.
Where do I Even Start?
A good way to start is by pulling up Zillow.com and looking for comparable homes in the area. Refine your search so that only properties that are currently listed for rent will show up.
Beware of the Rent Zestimate®. Although it can be a great starting point, Zillow's estimates can vary dramatically depending on the current supply and how practical local landlords are being. If there are only a few homes in the immediate area and they are all overpriced, chances are the Zestimate® will also be overpriced.
Zoom out on the map and look at comparable homes in the area. If your home is a single story home on a big lot in a special neighborhood, then compare it to similar homes. Don't just compare your single story home to a 2 story condo with the same amount of bedrooms.
Take an Unbiased Look at Your Home
Are you being honest with yourself about the condition of your home? If you aren't honest upfront, the free market will force you be honest by allowing your home to sit vacant. Do you have "charming" purple carpet? That might considerably lower the monthly rent. Is your home smaller than average, or does it backup to train tracks? If so, that will limit how much a tenant is willing to pay.
If you're starting to feel overwhelmed, ask your property manager what his/her thought process was as they were going through the comps. Property managers look at comps nearly everyday and it gets easier with experience.
Once you find a few good comparable homes be sure to check how many days they have been listed. If a home has been listed for more than 30 days, chances are something is wrong with it or it is overpriced.
What Will Your Tenant Think About the Price Increase?
Once you have a general idea of what the fair market value of your home is, consider what is going through your tenant's mind. In my experience as a property manager, many tenants are very savvy when it comes to paying rent.
Good tenants know (thanks to Zillow) that they can move down the street to that house that doesn't have "charming" purple carpet and a train running through their backyard. And, when they find out that they can upgrade for only $50 more per month, they're going to leave.
Do You Know How Much Finding a New Tenant Will Cost?
Finding a new tenant can be expensive! Let's run through a typical tenant turnover together. Let's assume that the rehab takes 1 week, finding a new tenant takes 2 weeks, and the tenant moves in 1 week after that. Let's assume that the home rents for $2,000/month.
- Vacancy - 1 Month - $2,000
- Rehab - Fresh Paint - $1,800
- Rehab - Misc. Repairs - $1,500
- Tenant Placement - $500 - Minimum (depends on property manager)
- Total = $5,800
Now, let's assume our hypothetical price increase was $200. It would take 29 months to make up for this turnover. For more information about minimizing vacancy, be sure to check out this article.
How Much Should You Raise the Rent?
The philosophy that Mesa Properties has adopted is that when a lease renewal comes up, a home should be rented for roughly 7% below market.
So if comps on Zillow are going for $2,000, keeping your home right around $1860 is a good balance between leaving money on the table and raising the rent so much that the tenant leaves.
Yes, it is possible for you to raise the rent more than 7% below market. However, raising the rent too much greatly increases your risk for having to pay to find a new tenant.
Summing it Up
Deciding how much to raise the rent is tough because while you don't want to leave money on the table, you also don't want to force your tenant to leave. Using the 7% under market rule is a good rule of thumb to help maximize your profit.
Sometimes it can be difficult to assess your own home because there is so much sentimental value attached to it. Sometimes it's hard to realize that your "charming" purple carpet isn't so charming to tenants. Being honest with yourself about how much your home can rent for can be tough.
This is where unbiased professional property managers come in. They don't have any sentimental value attached to your home, and they can take an unbiased look at the comps and tell you what you can realistically expect.
For more information about getting getting your home rented out as fast as possible, take a look at this article.