All landlords want to raise rents to at least keep up with inflation. However, it is difficult to raise the rent on a regular basis. Let me show you how to increase your rent with minimal strain.
I recently received a surprise $200 automatic rent increase from a new tenant. They pay electronically on the 1st of every month.
In mid-2022, when my tenant first found listings for newly renovated rental homes, I was asking for $8,500. I hadn’t rented a single-family home in San Francisco since 2017, so I wasn’t sure how much to charge. However, after a quick look at the comp on Craigslist, I decided $8,500 was plenty.
I have just completed a thorough ground floor remodel by creating a bedroom, living room, full bathroom, small closet, hallway and a dedicated laundry room. The downstairs area has expanded from about 300 square feet to about 600 square feet.
Prior to the renovation, they charged $6,800 per month for the upper two floors. The home has now been completely renovated with the highest quality finishes you can find in a nearby showroom.
I accepted the first $8,000 monthly offer because I thought a family of three would be a good fit. They were traveling to Europe for a month and a half and wanted to secure property before leaving.
$8,000 was $1,200 more than what I was billed for the month. And the rent increase equated to his 12% gain ($14,400/$120,000) on renovation costs. Not too bad compared to the S&P 500’s historical average return of around 10%.
However, I objected to their offer, especially for good tenants, who were reluctant to raise their rent. I didn’t want to lose it, but he felt that $500 less than the original asking price was a big deal.
I offer $8,000 per month for the first 12 months if you agree to pay $8,200 per month for Year 2, $8,300 for Year 3, $8,400 for Year 4, and $8,500 for Year 5. said to accept they were in a good position.
Over five years, they ended up saving me $13,200 in rent from my initial request (1st year savings: $6,000, 2nd year: $3,600, 3rd year: $2,400 , Year 4: $1,200). This was my way of creating an incentive structure for signing rental agreements and staying longer. An extra month spent looking for a tenant would mean at least $8,000 in lost rental income.
In the end, they accepted my counterproposal. I was happy to secure a tenant that looked good on paper. Previous tenants were 2 toddlers, 2 parents and 1 dog. So if you’re a new tenant with two parents, him, one kid, no pets, and spending the summer abroad, you should see less wear and tear.
The wonders of the automatic rent increase clause in the lease contract
One of the main reasons single-mother landlords like me do this is no It is human nature to maximize profits.
Smaller landlords may find it difficult to raise their rent each year, even though costs are rising year by year. As such, if you want to invest in real estate, it may be more profitable to invest in a professionally managed real estate fund. No negotiations are necessary as the sponsor manages the property for you.
Five to 10 years of no rent increase could end up significantly reducing income for single-mother landlords. Most cities have a maximum rent increase that a landlord can charge each year. So if you don’t raise your rent for 5 years and then raise it by the maximum percentage (e.g. 3%) in year 6, you can hardly cover the increased costs.
The only way to remedy this situation is to evict the tenant and reset the rent to market value. In some cases, however, tenants can stay for much longer than is economically optimal, especially if they don’t raise rents on a regular basis.
Eliminate the hassle of rent increases by incorporating an automatic rent increase schedule into your rental agreement. All landlords should at least want to try to keep up with cost inflation.
of initial Since the negotiation period is all new, it’s easiest to introduce automatic rent increase clauses. Landlords are trying to find the best tenants and negotiate the best prices. Meanwhile, prospective tenants are researching the rental market, trying to find the best terms and conditions.
By agreeing to terms first, both landlords and tenants can model their income and expenses accordingly. This way, there will be fewer surprises and greater financial stability for both parties. Like a prenuptial agreement, expectations are set. This is a win-win situation.
When using the automatic rent increase clause
Landlords should always include an automatic rent increase clause in their rental agreement. Increases as low as 1% per year are possible, as long as the law allows. in the end, the market will decide Whether the offer price and terms are attractive. If the landlord does not have a taker, they will have to adjust accordingly.
An automatic rent increase clause is easy to introduce when tenants try to negotiate with landlords in the early stages. If landlords like their tenants, they can close the deal by offering discounts in advance along with a rent increase schedule. An automatic rent increase clause can be used as a compromise.
For me, being able to rent to tenants who may stay for 8 years is priceless. I said her 8 years because the prospective tenant led me that way considering my daughter was her 10. In 2030, she will graduate from a nearby high school.
I’m used to an average turnover rate of about every three years. The stable cash flow also enhances the value of the asset when it is sold.
One of the biggest reasons I sold my main rental in 2017 was because I had five roommates as tenants. As a result, there was constant replacement every year for three years. These current tenants act as a unit. As a result, they are less likely to leave their jobs unless they get divorced or change schools.
Check your city’s rental laws
In San Francisco, leases are only valid for a maximum of one year. After the one-year period ends, it will be monthly thereafter.
Therefore, in reality, the automatic rent increase clause is not enforceable. Rather, lease agreements are inherently good faith documents. The more honest both parties show, the better the relationship will be.
After one year, the landlord can charge higher rent than the terms of the lease. Maximum percentage by law. Alternatively, the landlord can stick to the original lease and rent increase clauses. At the same time, the tenant can decide to move out with her 30 days’ notice.
Check your city’s rental leasing laws. Each city has different laws.
A good relationship between landlord and tenant is everything
Becoming a physical rental property owner is no easy task. I wrote that there is a love-hate relationship because there is always something going on with being a landlord. But my frustration with being a landlord eased as soon as I accepted that being a landlord was like a part-time job.
I used to get annoyed when something happened. This was the wrong attitude because owning a rental property does not create 100% passive income, but instead creates semi-passive income.
If you can find a tenant that respects your property, pays on time, and is considerate of your neighbors, you are a winner. But to find such tenants, they have to be vetted like the CIA. Do not let emotions get in the way of due diligence in understanding their financial situation, employment history, and rental history.
It’s worth the extra time to find the best possible tenant. Because once you find a bad tenant, it can cost you a lot of money in the future.
All agreements or terms must be in writing. Otherwise, there are too many situations where gray areas create conflict.
Examples of Minor Landlord-Tenant Disputes
My tenancy agreement states that front and side yard maintenance is the tenant’s responsibility. Maintenance includes weeding and watering all plants once a week. These are small gardens, but they are important to the overall aesthetics of the house. Unfortunately, every time I drove by, it got overgrown with weeds and killed two large plants in front of me.
Then the tenant asked me if I could cover the cost of removing the dead plant in front of it because it was “unsightly”. But I am now faced with a dilemma as I know they are not tending the garden regularly.
I think that if I had watered them regularly, the mature plants would not have died. He had been living without problems for 12 years before the plants moved in.
Wanting to avoid conflict, I paid a few people to dig up the dead plants and take them to the trash. While they were there, I also had a neighbor cut down overgrown vines that were falling off.
I plan to plant some large succulent puppies in the near future that need more space. As the final step in remodeling my rental property, I just wanted to simplify and beautify my front yard. But if it wasn’t, I might not have been obliged.
As you can imagine, the $200 increase in rent was quickly used up and some more was spent. Ah, the never-ending price of being a good landlord.
A low turnover rate may mean you’re a bad landlord
Finally, I have a desire to upgrade my home, so I’ve been wondering how to scrape together enough cash to make an all-cash offer. The most optimal solution is to sell your property tax-free for up to $500,000 and use the proceeds, cash on hand, and some securities.
You were reviewing three real estate rental portfolios in San Francisco and noticed that there had been no vacancies for over five years. At first I thought: Go! I am a very good landlord who takes care of all the needs of my tenants. I have a good relationship with all the residents.
But then I realized that the real reason we had such a low turnover rate for so long was likely because we were below market rents. If my tenants didn’t have such a good deal, they probably would have moved out long ago.
If the rent doesn’t go up every year, your net rental income will decrease.All expenses such as property tax, insurance, maintenance, materials, labor costs 2% to 5% increase per year on average. But I’m more concerned with continuity and harmony, so I’ll bear the cost.
The next time we need to find a tenant, we will include an automatic rent increase schedule in the lease agreement. I think prospective tenants will appreciate the visibility of the rental. On the other hand, knowing that you can at least cover the rising costs without notifying your tenants of the rent increase can make you feel better.
Reader Questions and Suggestions
If you’re a landlord, have you signed a rental contract that includes a schedule for rent increases? If you’re a landlord, have you included a schedule for rent increases in your rental agreement? , what are the negatives and positives of the rent increase schedule?
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