How do you increase a tenant's rent smoothly and without risking losing a good tenant?
Read transcript on how to increase rental property rents here.
Today’s question is from Scott P. Brady.
“Joe, I notified a tenant of an increase in rent on one of our properties and he demanded a reason for the increase. He said he had a legal right to know. Here’s the reason: it's not your property! How would you have handled this? I know you're all business.”
We are all business, but we may not be “all business” the way you think we are! We’re the most highly reviewed property management company in Philadelphia, and if you look at our reviews, a large part of them are actually from our tenants. I think this is the source of my answer to your question.
We future pace our tenants. Our tenants enter into a relationship with us right from the start, with eyes wide open. For example, we have a three-page document that goes out to new tenants that says, “Hey, if you were to put a one-inch-by-one-inch hole in a drywall wall, this is what we will likely charge you.” There are no surprises with us. In fact, when a tenant moves out and they're expecting us to charge them that fee for a one-inch-by-one-inch hole in the drywall and then we charge them only a quarter of that—because it only cost us that much to restore the property—they're pleasantly surprised.
In respect to your question, in order to effectively future pace our tenants, we have rent increases built into our leases. We automatically increase rent annually by a certain number that we've tested over time. By adding this into the lease, we avoid taking on a troublesome tenant that might see this and protest, “No way, I’m not going to sign a lease when I see it's going to escalate so much in a year!” Our tenants already know that it's mentioned in the lease from the get-go—in three different spots, actually—and then we also warn tenants about the increase ahead of time. However, we don't just warn them of an impending rent increase; we also remind them that this is not news. The rent increase was in the lease, and we also let them know that it's beneath market price, which it is! Our rent is set beneath what we anticipate market price to be.
In this scenario, the owners win, because the cost of vacancy far outweighs getting an extra twenty dollars a month, or however much it may be. This is not to minimize the impact of an extra twenty dollars a month, but vacancy kills—so, we warn our tenants far in advance. With this method, we don't typically have tenant conflicts about the matter. Our tenants would have known this right out of the gate, and as I said, we do have strategic reminders in place to make sure they know that this is coming as well as a rent increase letter that states that this has been a known fact all along.
Again, tenant relationships are crucial to avoid these kinds of conflicts, and I think our method of handling things is why we end up having fairly solid relationships with our tenants. We are all business, as you said—and probably more so than any other property management company—but at the same time, our tenants know us very well before they even begin a relationship with us.
You may not be able to appease this particular upset tenant, but prioritize transparency and tenant relationships going forward and we think you’ll encounter much less resistance!