Adjusting rent rates at renewal is part art, part science, and it requires some skill to tactfully introduce an increase. While residents often expect a rate adjustment during lease renewal, most will start packing if those increases feel too greedy.
As you consider your options for increasing rent rates, tread lightly. While keeping your rental units filled with existing residents is almost always preferred to sourcing new tenants, at the end of the day, it’s in your best interest to ensure your investment remains profitable. So, how do you balance rent rate increases while minimizing tenant turnover?
Review Current Market Conditions
Whenever a lease comes up for renewal, you should conduct a fresh market analysis, but take this information with a grain of salt. Here’s what we mean.
Say a resident has been with you for two years. During that time the market rate in your area has skyrocketed 20 percent. “Wow!” you think. You may be tempted to adjust your rates by the same 20 percent. Don’t! Especially if you want to retain your existing resident.
Why? Because it feels greedy to them and now you’ve left a bad taste in their mouth. For the majority of residents, that’s a good enough reason for them to shop around for a new place, even if it ends up being more expensive and stressful for them in the end. Our team at RL Property Management has seen it happen time and time again, and you’ve likely experienced a similar phenomenon in your own life.
How to Strategically Set Rent Rates at Renewal
Instead, consider setting a renewal price that is somewhere between 0 and the maximum current market rent. Ultimately, you want to set rent as high as possible without that resident moving out. This requires skill and tact, but here’s why (and how) you should do it.
Every time you have a vacancy, there are significant costs associated with it. Not only are you not collecting rent during that time frame, but you’re also incurring the costs of turning over the unit as well as taking on the risk of an unknown tenant. That can be huge. With every new tenant, there’s a slight risk of them going bad. Maybe they won’t take care of the unit, or maybe they’ll get evicted. You just don’t know.
If you already have a good tenant, there’s inherent value in retaining that known commodity.
Consider the Costs
When selecting a renewal price for an existing resident, you have to bear all these factors in mind.
- What are the costs of turning over the unit? Our experience is that turnovers generally cost anywhere from 1 to 4 months of rent just for repairs and improvements.
- How much will you lose during the vacancy? Remember, you’ll still have to pay the mortgage and other recurring expenses when your unit sits empty.
- What risks are you willing to take on with a new tenant? There can be many red flags to watch out for during a new tenant screening process. If you’re not careful, you could end up with bad tenant.
Consider these variables as you assess your market and feel out your resident’s history at your property. How long have they been there, and how happy do they seem? Establishing rapport and good communication with the resident can make this task much easier.
Then, come up with an educated guesstimate that is as high as you think the resident is willing to pay. If they come back and ask to negotiate the rate, you should seriously consider doing it, especially given all the expenses that go into losing the existing tenant.
Contact Our Team for Help
Managing tenant expectations when it comes to rent requires you to stay closely attuned to current market conditions as well as the resident’s overall satisfaction with your property. Before making a decision, you must balance your bottom line with the overall costs that go into potentially losing an existing resident.
If you have questions about setting rent rates in the Columbus area and how a property management company can help reduce your vacancy rate, give our team at RL Property Management a call at 614-725-3059.
