Hey all,
I was wondering about the best way to increase rents. Is it better to have an "escalator clause" written in the lease (like say 3% annual increase)? Or is it better to just wait until the tenant moves out or the lease is up and increase the rent? Any thoughts? Thanx.
Rents go DOWN as well as up, depending on market conditions. I would not put an escalation clause in the lease unless you want the tenants to move out when the lease is up.
Mike
I only use rent escalation clauses in multi-year leases. I also include tax escalator clauses as well. Otherwise, I just review the tenancy and market near the end of the lease and decide how much to raise.
A question: about rents going down. Most investors in the rental market seem to think that in the wake of foreclosures that demand for rentals will be high. That makes sense.
But is it a foregone conclusion that rents will increase. Only the Chicken Little crowd is expecting a Soylent Green meltdown, but even in a moderately bad case scenario if the unemployment rate is extreme does any one think that rent amounts could be impacted?
I spent some decades in CA. in the S.F. Bay Area, and we all know about that place. For years I was a voice crying in the wilderness, contending that prices were fixing to adjust. There was even a short lived tendency following the Dot Com bust for rental prices to come down a little bit. My logic was simple. At some point the tangents of value and affordability do intersect. Haven’t there been some urban areas within the last 25 yrs.
where for a while after a serious real estate bust whole housing tracks lay vacant because no one was working and could afford to even pay rent?
Sure, people always need a place to live. But they don’t neccesarily always need to live where they’ve been used to living. The Okie migration to CA. is not the first diaspora of a displaced agricultural people. Now 2 generations later they’re getting foreclosed on and are renting U-hauls to move back. The stream of people across the border is another such migration.
from my experience, escalator clauses are more typical in commerical leases. while you can certainly use them in residential leases, you run the risk of scaring off potential tenants.
as for rent prices, yes, there is some pricing pressure as a rental of a flood of “for rent becuase I can’t sell” going on. In most cases (definate here in Calif), even if those places get rented, the owner is shoveling money into the mortgage every month and thus is just a temporary situation.
to answer the original question, I typically raise rents either when a place turns over or every two years for existing tenants. When I do a rent increase for a good, on-time paying tenants, it typically amounts to about
5-8% which means between $25-50/mn (this assumes that the market rent has increased which is not always the case). I also usually do it in the spring to get people past the winter heating season and self-inflicted financial pain of the Christmas season. While no one like having their rent increased, I see no reason to let tenants live fanatsy world of a fixed priced rental cost over a lengthy periods. Prices go up; its a fact of life. Lastly, if someone moves over a $25/mn rental increase then they were probably not happy there and going to move soon anyway. Rental increases can also be used a tool to “motivate” less than stellar tenants to hit the road.
Thanx guys. I like the idea of adjusting the rents to the market conditons when a vacancy comes up. This actually leads me to another question. Is it usually customary to leave a good long term tenant’s rent alone? I’ve been a long term tenant before and appreciated the fact that my rent only increased $5 in 8 yrs. My gut tells me to leave the good tenants alone. Thanx
Thanx aak5454.
You should raise it 1-3% each year. Your costs go up each year and the rent needs to cover them. One day you may find the rent doesn’t pay the bills and you need to implement a large increase, which may cause the tenant to leave. I try to keep rents for long term tenants high enough to pay the bills and low enough that it doesn’t make sense to move.