Should you increase rents annually?

Updated: Jul 21, 2020

Ihave a short answer and a long answer for this frequently asked question... Short answer: Yes

Long answer: Read this article.

Now this might not be the same for every market but bear with me: Here in Ontario, Canada we have a guideline to follow for the maximum amount a landlord can increase rent in a tenanted unit without applying to the court. The average is usually about 2% every 12 months.

Let's put this in context: 2% on a 1,000$ rent is only 20$ more a month for the next 12 months.

After that 12 months you can increase again, that's another 20$. So it will take you 2 years to increase by 40$. But by that time, your unit might be worth 100$ or 200$ more depending on the market inflation. If you waited 2 years to start increasing, you might never catch up if that tenant decides to stay for 5+ years.

If you're wondering: "Yes but is it really worth pissing off my tenant for only 20$ and risk losing them?" my short answer is again, yes. My long answer comes down to several aspects that you should consider before.

Let me start with why I say ‘yes’ in my short answer:

It's important to stay ahead of inflation otherwise the rents in your building can rapidly become below market value, resulting in a building that's lost value, tenants that won't leave, a landlord that lost motivation to handle the day to day and a building that might start to degrade. Then the only way out for that landlord might be to sell the building, perhaps at a lower value. You might think that sounds extreme but it happens all the time and it's the kind of building most investors look for when deal hunting.

Personally, I like to make sure my assets are always working for me at their full potential.

Let's say you find a new property you want to buy, but in order to buy it you need to refinance and pull out some money from your existing building. Well, first the bank will need to have your existing building appraised to determine it's current value. An appraiser will use 3 methods to determine the value of an income property:

  1. The Cost Approach (how much it would cost to build)

  2. The Income Approach (the net annual income that the building generates)

  3. The Comparison Approach (how much it could sell for in the present market compared to other properties with similar characteristics that have recently sold)

If your rents did not keep up with inflation and are lower than the current market rents, the income approach just might be the component that tanks your value (and your new deal).

My long answer:

Of course there are other things to consider before increasing rent and ultimately it's up to you to do your due diligence before deciding. Here's a few scenarios that could influence you not to increase:

  • the price was initially set high and 12 months later is still at a competitive price

  • supply increased in the area resulting in a lot of competition

  • the market is going down

These are the only scenarios I could think of that would make me not increase rent...

Lastly, this is the most common excuse I hear:

  • you never hear from the current tenant, they always pay on time so why bother and risk losing them?

Well to that I would say: don't be a lazy investor. Yes, you risk pissing off your current tenant and scaring them away. Although that might suck, if you do your screening right you should have no problem replacing this tenant with maybe an even better one but at an updated price. I personally usually see turnovers as a great opportunity to check up on the unit, clean it out and maybe even fix a few things that the ‘great’ tenant had never told you about.

Now why do I see turnovers in a positive way? Because I always ask myself: "Now that this tenant is moving, what changes can I make to increase the value and NOI (Net Operating Income) of my building?" Examples may include: Is there value-add potential to the unit? Could I convert a den into a 3rd bedroom to increase rent? Could I add coin operated washer/dryers? Based on comparables, could I start charging for the use of the detached garage instead of including it in the rent? Could I start charging for parking spaces? Could I have the new tenant take over a utility that use to be included? Could I have the new tenant supply their own appliances this time reducing my maintenance calls? (etc.)

If you do find a way to add value, could you do these changes and refinance? Who knows, this could be your opportunity to turn an average unit in your portfolio in a well greased cash flowing asset. You could pull out some money and start hunting for that next deal! (just make sure you don't pull out too much and turn your cash flow negative). Even if there's no room to add value, I would still consider increasing just for the need to stay ahead of inflation and keeping your building in the game.

Basically all I'm trying to say is don't let your fear of turnovers be the reason not to increase rent. Some of our best cash flowing units came from this move of announcing an increase and taking the opportunity to make value-add changes. Although it can be sad to say goodbye to a good tenant, chances are if an increase of 2% bothered them that much, they probably weren't that happy in that unit to begin with and you might of just forced them to find a home that better suits them.

Either way, make sure it's not just your head making up excuses because you're afraid of confrontation. Always make sure you know your market, you're following the local laws and if your tenant happens to get upset well it simply brings me back to my core rule: Treat every rental as a business and never let emotions lead your decisions.

42 views0 comments