In the dynamic landscape of real estate investing, understanding the nuances of rent adjustments is crucial for maximizing returns. As of 2020, rent prices in the United States have increased by a staggering 149% from 1985, with an average yearly increase of around 3.2%1. Nashville’s average rent increase per year on a 2 bedroom apartment increased 21% year over year from 2022 to 2023.2 These statistics underscore the significance of periodic rent adjustments for real estate investors. In this article, we’ll delve into the strategic aspects of raising rent, exploring how to navigate this process without losing tenants, assessing its impact on property value, and identifying valid reasons that justify rent increases.
How to Raise the Rent Without Losing Tenants
It’s often an overlooked fact that owning a multifamily property means you are also a business owner. Very few industries are expected to keep their prices the same year after year regardless of increasing costs of goods, labor and operating costs, so rents should increase over time. However the rental market does have some elasticity built in to it, meaning your renters may move out if you do raise rents too quickly. By offering some value to your tenants you can avoid costly vacancies so we recommend these 3 things:
Determine How Much Rent Increase is Normal for your market.
One of the initial steps in strategically raising rent is evaluating what is a fair rental increase and how much you can incrementally increase it without negatively impacting tenant retention. Researching local market trends using platforms like Zillow, RENTCafé, and Rentometer can provide valuable insights into fair market rents. By staying informed about comparable properties, you can make informed decisions on the magnitude of rent adjustments. You can also request a free market rent report from one of our agents today.
Rent Increases Should be an Aspect of Your Lease
Integrating rent increases as a transparent and routine element of the lease agreement can set clear expectations for tenants. Providing advance notice, offering incentives for early renewal, and explaining the reasons behind the increase are effective communication strategies to minimize tenant complaints and maintain positive landlord-tenant relationships. Ultimately you will never be able to make everyone happy and there is a reality that keeping your rents up to market standards may price your units out of reach for some people. Making rent increase annually makes them predictable and this will reduce the stress on your tenants.
Make Upgrades to the Rental and Stay on Top of Maintenance Needs
Investing in property upgrades and ensuring proactive maintenance not only enhances the value of the rental but also justifies rent increases. Tenants are more likely to accept higher rents if they perceive added value in terms of improved amenities, aesthetics, or overall living conditions. When you are scheduling your regular repairs and maintenance plans be sure to talk to your tenants about how these changes may impact their rent amount. You do not need to show them your receipts however helping tenants to connect some increase in the quality of their living space to the increase in rent will go a long way to reducing turnover.
Are Capital Expenditures Required for Raising Rents?
Upgrading facilities, enhancing amenities, or addressing maintenance issues involves additional costs, but if they bring about higher rents they can significantly contribute to the property’s overall value. Typically basic cosmetic upgrades like floors, cabinets, countertops, appliances and paint will produce a good Return on Investment. Our “Quick Tips” page has a number of suggestions on things landlords and property managers can do in-between tenants to ensure a good ROI. Small multifamily owners should always consider how long it will take them to recoup their expenditures before choosing to make upgrades.
Example: Jim owns a duplex with window AC units and baseboard heating. One of his units has an AC unit that quits working and so he has a decision to make. He can either buy a new Window unit or convert the unit to some sort of Central AC. The cost for a new window unit is $450, but installing a mini-split unit is $1500. If the mini-split unit allows him to raise rents only $25/mo it will take him 42 months to recoup those expenses.
How Does Raising Rent Impact My Property Value
Raising rents can positively impact the overall value of the property. By aligning rents with market trends, investors enhance the property’s income potential, which directly influences its valuation. Understanding the relationship between rental income and property value is essential for making informed investment decisions. Raising rents will increase your Net Operating Income. For Small Multifamily (2-4 units) the ability to cash flow is helpful but ultimately not the only consideration when banks issue loans. For 5+ units your NOI plays a crucial role in determining property value as we will see in the next section. Our “Added Value Calculator” below will make it easier for you as an investor to see the potential benefits of raising rents on your 5+ unit multifamily property.
How Does Net Operating Income (NOI) Impact Property Value
For multifamily properties larger than 4 units the Net Operating Income is a crucial metric that measures the property’s income minus its expenses. By strategically raising rents, increasing income, investors can improve their NOI, leading to a higher property valuation. Analyzing the interplay between rental adjustments and market cap rate is essential for gauging the impact on property value. Using a simple formula [(Rent Increase X Units X 12Months)/Market Cap Rate] you get a properties value. This applies only to commercial properties of 5 or more units. Therefore, a fourplex will appreciate with the market, but you cannot force the appreciation by increasing the income. So in terms of building long-term wealth, a 5+ unit is better.