Management One Property Management

How to Determine Rental Increase Rates for Lease Renewals

By Melissa Astudillo

 

It’s that time of the year and you’re wondering how to determine the rate of the rental increase for your resident. What kinds of factors should be taken into consideration when coming up with that number? Management One has been assisting homeowners to answer this very question for over 30 years. In this article, we will discuss how to determine the right rental rate for your property.

Flat Rate Rental Increase

With this type of rental increase, you assess a flat rate that continues every year. A flat rate increase is a number that may seem reasonable, such as an increase of $50 a month.  Every year you increase the rent by a flat rate of $50 a month. The flat rate increase is not affected by exterior factors. This is the type of rate to use if you are not interested in ROI or saving for major home repairs or upgrades. Most landlords use this to keep the residents “happy” and a home occupied. However, it may be preventing you from capitalizing on your investment.

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Variable Rate Rental Increase

Variable rate increases for lease renewals may be determined by the following factors:

 

Rental comparable in the area:

Sites like Zillow and Trulia give you on-hand (free) information on how other homes in your area are performing in the rental market. It is important to match homes in your area that are comparable in the following categories:

  • Square footage
  • Year built
  • Number of bedrooms
  • Number of bathrooms
  • Amenities

 

 

Running such reports will help you identify what area of the market your home falls under as well as give you information on what upgrades might be needed to the home to achieve top dollar revenue for the investment.

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Resident Payment History

It’s important to take into consideration the resident’s payment history. Do you have a renter that is constantly late, doesn’t pay late fees and just has an overall disregard for the rules? Do you want to have this person in your home and go through those issues for 20 years?

It is important to consider what kinds of implications their actions have on you. It may make your mortgage payment late if you do not have enough extra capital to front those costs, or it may have you pulling money from one account to the other to cover those expenses.

rental increase

Any time you spend having to figure out how to maneuver the lack of funds at the beginning of the month might be a loss to you since you’re using your precious time to rearrange for such things, and we all know time is money right?

Therefore, whether they pay on time or not has a direct effect on your bottom line. Let’s not even get into the eviction process. That in itself is a complex subject that has a wide variety of variables to consider. However, it is part of the payment history variable. Are your resident’s constantly in eviction? Do you let them buy out every time? If so, for how long? Think about the variables and make a decision based on how it affects your bottom line.

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Violations of the lease agreement

 

These “violations” are breaches of contract that the resident is causing. These are dependent on how the contract was worded and what kinds of things were included in it. Here are some examples of common breaches of contract, or “violations”:

  • Mowing the lawn
  • Watering the lawn
  • Weeding the lawn
  • Basketball hoops on the driveway
  • Un-operable vehicles in the driveway
  • Oil stains in the driveway
  • Unauthorized pets inside or outside of the home
  • Unauthorized occupants

These are just some examples of common breaches of contract that have a direct impact on your investment.

rental increase

Are they taking care of the home or destroying it? Granted there is a fine line when it comes to inspecting the interior of the home on a repeated basis. You don’t want to tell them how to live their life or impede on their quiet of enjoyment. However, as a landlord, you have a right to expect that the resident will take care of the home and comply with the rules and regulations set out in the lease. If they are not complying, how does that affect you?

rental increase

For example: let’s say you have a beautiful home with a well-manicured front lawn with flowers lining up the entrance, but your resident never waters the lawn and the lawn dies. Now, you must pay a gardener to either re-sod or seed and cover, buy more flowers, and spend extra money in water to bring the lawn back to life. This is an extra cost that you wouldn’t have incurred if they hadn’t “violated” the agreement to keep the home just like you gave it to them.

As you can see these kinds of behaviors affect your investment and may cost you up to thousands of dollars in repairs in the future. Do you want to have a resident in the home that doesn’t take care of it? Would you give them a flat $25.00 rent increase?

honest contractor

When dealing with rental increases it is easy to get carried away with pleasing the resident to avoid a vacancy. However, it is important to line all variables up and determine if that is indeed the best option for your investment property. Determining the rental increase using the variable format will require more works and a wide variety of factors to be taken into consideration but it also provides a more wholesome understanding of the status of the rental.

Here at Management One, we consider all of these factors when determining how much to increase the rental rate on a lease renewal. We can provide you with a Free Comparative Rental Evaluation…a report that suggests a Fair Market Rent Value, based on recently rented properties that are comparable to yours. There is no obligation, it’s our way of providing you the information you need to make a decision to increase the rental rate on your investment property.

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