Not sure whether or not you should raise the rent on your rental unit(s)? In this article, we provide a quick case study that shows some of the trade-offs you should make when considering a rent increase. In general, if the rent increase will generate more revenue than the costs associated with turning the unit over and finding a new tenant within 12-months, it is probably a good idea. If the potential loss in revenue (from your current tenant moving) would take more than 12-months to make-up with a new tenant at your new proposed rental rate, then it may be a good decision to hold-off on the increase
The national average turnaround time for a unit is approximately 30 days (i.e., the time that it takes between when it becomes vacant to when it is filled with a new tenant). This is what you should consider each time you are raising the rent when you have an existing tenant. The key here is to weigh out the costs versus benefit: If you increase the rent too much and the tenant moves out, are you going to make-up the losses due to the extra turnover expenses? We will run with a simple example here to show the process, but you can do your own calculations in order to assess the best course of action for your particular situation:
A Simple Case Study
You have a single-family home you are renting out for $2,000/month. You have a tenant that has been in your unit for 3-years, and by all accounts the tenant intends to stay for at least another couple of years. However, you haven’t increased the rent on the tenant since they moved-in (probably one of the reasons the tenant is choosing to stay), and now the market rent for this unit is $2300/month.
You are left with the decision: Do you increase the rent? If so, by how much? How do you determine what the optimal path forward is?
Well, let’s start with the basics: If you raise your rent to $2300/month (market rent) and your tenant moves out, what does it cost you? And how long will it take you to re-coop your costs?
Using the above, we can say that at $2300/month in rent, you would lose $2300 in ‘lost-rent’ (vacancy time during turnover) if the tenant moves-out and you would also have additional turnover costs, let’s say they come to a total of an additional $1300 (cleaning, administrative costs, marketing, repairs, etc.). This puts you at a total loss of $3600 if your current tenant decides to leave. So here the question becomes, if you increase the rent, how long does it take you to repay this loss? Well, you’d be getting an extra $300/month, so to make up $3600 it would take approximately 12-months. Given that the average tenant stays for 2.2 years, you would likely be safe to increase the rent in this case, as long as you are okay with the short-term losses. As an alternative solution, you could incrementally increase the rent for the current tenant by increasing the rent to around $2150/month for example. This may be a small enough amount for the current tenant to stay, while still enabling you to increase your rental revenue.
Each situation is different, but the cost-benefit-analysis above should be carried out each and every time you intend to raise the rents at your units. This will enable you to ensure that you are maximizing your profitability.