Raising the Rent When Tenants Are Struggling
Being a landlord is a business, and when you are in business, the first rule of thumb is to make money. That’s often done by raising rents, but what do you do when tenants are struggling? There’s no one-size-fits all solution, but weighing the options under the umbrella of “conscious capitalism” will help you make the right decision – a decision that’s right for the landlord and fair for the tenant(s).
What is Conscious Capitalism?
“The term conscious capitalism refers to a socially responsible economic and political philosophy. The premise behind conscious capitalism is that businesses should operate ethically while they pursue profits. This means they should consider serving all stakeholders involved including their employees, humanity, and the environment—not just their management teams and shareholders. The idea of conscious capital was created by Whole Foods co-founder John Mackey and marketing professor Raj Sisodia.” – Investopedia
Comments/Advice from our RealWealth Leaders
Kathy Fettke, Co-Founder/Investor: “This topic is very timely. I often hear about investors who are “pushing rents.” I understand that landlords need to raise the rent to cover costs and earn a living, but they also need to be sensitive to tenant needs. Double-digit rent increases do not show sensitivity. Unreasonably high rents may also trigger political consequences, such as rent control. And, highly restrictive rent control can be bad for everyone if the landlord can’t afford to pay for maintenance and repairs. But I do believe in maximum allowable rent increase controls to keep bad landlords in line — like the ones that take advantage of natural disasters by jacking up the rent on tenants desperate to stay in the area or replace a home they’ve lost. A balanced landlord/tenant relationship is a better goal.”
Rich Fettke, Co-Founder/Investor: “It’s best to impose smaller, incremental rent increases each year, than to wait a few years and ask for a big rent increase. But the amount of an increase is very specific to the rental market, so if that market is not where you live, it’s best to confer with the property management company. One way to ease the pain of a rent increase is to update or fix something for the tenant in unison with the increase.”
Joe Torre, Investment Counselor/Investor: “My rent increases start with the property managers. I ask them what the current maximum is for market rate rents, and then I try to find a happy medium to retain the tenant. It’s a win/win for both sides. It’s important to remember that the best tenants have options. If you try to squeeze every last dollar of rent from them, the good tenants will leave, and you’ll be stuck with the tenants that don’t have options.”
Aristotle Kumpis, Investment Counselor/Investor: “I typically raise the rent every two years unless the rent is well below market rates and in need of a yearly increase. But I consult with my property manager about whether we should raise the rent or not. It’s also important to keep track of leases and rent levels yourself so you can remind the property manager to review them. I find that you often have to give them a nudge!”
Leah Collich, Investment Counselor: “Some tenants wrongly assume that all landlords are rich. In reality, investor margins can be extremely small, particularly at the beginning. Costly repairs or a problematic tenant can leave a landlord recouping losses for several years. Landlords offer a service to tenants who agree to pay a fixed price in rent instead of the variable expenses associated with homeownership. Over time, these expenses go up for landlords, so rent prices must also go up, but there is a difference between predatory rent increases and necessary market rate increases. Appropriate rent increases allow for continued quality service for tenants.”