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Rent Increase Philosophy – Personal Investments

We own two rental properties. They are nice middle class houses in other states. I think there are two posts there, why other states (I’m in California) and why middle class houses. Both are for specific reasons but I’ll discuss that another time. We are in lease renewal season for us and so it got me thinking about how and when we raise rent on our tenants.

Here is my general philosophy, there are definitely pluses and minuses to this thought process so I’m not saying this is how anyone else should do it but its always nice to hear different people’s method. I always explain to our tenants if we have personal contact with them or to the management company (we have one of each), that my goal is to raise rents over time, but at the same time I’m not trying to be a corporate landlord that maximizes current cash flow. I remind them that this is an investment for me but I recognize it is a home for them. I always want to be charging below market rent after a few years. If you have good tenants, you don’t want them to leave, it costs you money and stress. So good tenants deserve something and in my head that means them paying less than they would if they switched to a new place, it also means they are less likely to switch. If they don’t like the small rent increase we give, they can go look around at other places and realize “ohh man I guess we kind of have a deal here.”

This is a needle you need to thread carefully. Some mom and pop owners never raise rent, and then 15 years down the line they are so far under market and the tenants have gotten so used to that low rent its very hard to move them up. Or you do the coward thing and sell the property and the next owner just jacks up the rent and your tenants are kind of screwed.

Recently rents on one of our properties has exploded by 30%. Our tenants were nervous we were going to increase their rent a huge amount. I told them no, but we will be raising some each year. In this case the rent was $1800, market rent had gone to $2500! I said we’d offer them a year lease at $1925, and a two year lease at $2000. I’m sure some people reading that would be like, “What the heck you are leaving so much money on the table!” But I think over the long term, I’d rather have grateful long term tenants and less guilt for squeezing someone. Again not advice just how I go about it.

My general goal with Real Estate investing is to have a collection of very long lived and low stress assets. I want those assets to protect me against inflation and eventually provide me with a decent portion of my retirement income. So I’m willing to sacrifice a little income now for lower stress and possibly finding super long-term tenants.

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