Investment Properties; Increasing Rent

Should I increase rent? A question that every landlord will find themselves asking at some point. I have the best tenants that live in my town home that I rent out in Woodbury, MN. They have been so pleasant to work with and I really do want to be the best landlord possible. When things go wrong, they are flexible and patient about it. For example, the washer went out during the pandemic and with supply chain issues, the fastest I could get a new washer/dryer set was two weeks out. They were completely understanding about it. I also contacted them recently to ask if he could turn the water supply to the water spigot in the garage due to the temps being scheduled to hit -10 degrees; he said he had actually already done that about a month ago (unprompted!! I mean what kind of tenant would be that pro-active in care taking for a property they don’t own?!)

Anyways, you get my point, they are great tenants. They have been at the home for the past 21 months and contacted me about renewing the lease that is up three months from now. They were interested in renewing the lease if the cost would not be going up too much. I let them know I would get back to them with the cost after analyzing my current numbers, but that I would try and keep the cost as neutral as possible.

I reviewed my current numbers and saw that my taxes, insurance and home owners association had gone up since I last listed the property for rent. I also searched Zillow for comparable rentals in the area; including search terms for slightly bigger properties with an additional bedroom to ensure I wasn’t missing any listings that could be seen as a better value than mine. I found a handful of properties including some in the same neighborhood. I compared the amenities, square footage, school districts, bedroom/bathroom count, neighborhood caliber, parking situation, you name it – I wanted to make sure I had a price in line with what could be considered the best value compared to its competition. You also have to remind yourself that it is a pain to move and most people will avoid it if they are comfortable in the home, so it is important to confidently go after a price that you feel is equally as fair to you. After my research, I sent the below email to my tenant and provided full transparency of my analysis and how I arrived at the figure I did.

Hi XXXXX!

Thanks for reaching out regarding the possibility of extending your lease and for your patience while I did some research!

I discussed in detail with Megan and we both agree that we would really like to make it as easy as possible for your family to stay in the home. We really value you as a renter and feel like we have totally lucked out with having your family stay at the home; you have been awesome to work with. We would be willing to keep the price below market value at $1,850/month with a renewed lease to hopefully make this possible. We can honor this for a 1 year or 2 year lease. With increasing expenses and rents increasing, the value of electing a 2 year lease would simply be having your rent price locked in for the next 2 years.

Here is a quick overview of our analysis in case it is helpful for you as well:

• After reviewing our current expenses, we have had increases to the association (increasing about 20% for 2022), insurance and taxes.
• Average rent increase estimated at 3-5% per year
• Based on market comps for 2 bedroom, 3 bathroom, upgraded floor plan, and neighborhood amenities/pool, I would re-list the property for $1,975-$2,050. Here are some comps that I am using:

Take your time to review and decide if this works for you and your family. Happy to connect if you have any questions or would like to discuss this further!

Thank you!

Blaine

They accepted and are renewing their lease until May 2024! I feel extremely fortunate to have such great tenants in the home for another two year lease and to have gotten a reasonable increase. The increases have definitely added up over the years for providing substantial cash flow. Even taking into the cost of inflation since I was earning about $250/month in cash flow. According to this handy US Inflation Calculator, that same $250 would be worth $309 today compared to the $650+ that we cash flow per month today. If you haven’t already, check out the behind the curtain look at the finances of our rental property.