Rent Increase
Etiquette
©
Copyright 2000-2011 Landlord.com
Keeping rent
at market level is part of the landlord’s
duty. He owes this duty to his investors,
partners, potential heirs, and himself. The
rent collected, especially in buildings of
four units or more, largely determines the
value of the property. “Collected” is the
key word here. What might be collected is
irrelevant. A landlord who allows his rent
to slip substantially below market is
allowing his property to deteriorate just as
surely as one who lets the roof deteriorate
or the floors rot. This implies that
raising the rent as needed to market levels
is as important a part of maintenance as
fixing roof leaks or unplugging toilets. It
also follows that the only justification for
a rent increase is to bring the rent to
market level; that gouging the tenant has no
part in the calculation. Once this
justification exists, the landlord need have
no fear of a tenant move-out or even rent
control. If the tenant moves out, then the
landlord will soon have another tenant if he
is demanding market rent. If rent control
comes, it was coming anyway, whether the
rent was raised or not. Politics, not rent
increases, causes rent control. It is
better to be collecting market rent and
using the extra money to participate in
political organizations that can block rent
control.
Your tenants will always hate a
rent increase, no matter how large or
small. I recall during one of the
innumerable energy crises of the 1970s
seeing a TV ad by some political pressure
group showing people parked by a business
that looked remarkably like a gas station.
But the people were wearing breathing masks
and instead of filling their gas tanks were
filling air tanks. The narrator asked how
we would like it if big companies could
charge for air. The implication was that if
we need air and it is free, then gas should
be free, or at least the oil companies
should be told what to charge for it,
because we need it also. Of course, it was
demagogic. There are plenty of tenants and
political activists who hold the same
delusion about rent. Just as gasoline does
not refine itself and move voluntarily to
the markets where it is needed, buildings do
not build and maintain themselves. The oil
company is entitled to sell, and the
landlord is entitled to rent, at such price
that people are willing to pay them, and, it
is hoped, realize enough to cover their
costs and make a profit for their own
subsistence.
But who sets the price? Who
sets the rent? The truth that some tenants
and tenant activists dislike is that tenants
set the rent. No landlord in history has
been able to gouge more rent than some
tenant was willing to pay. The landlord can
demand $1000 per month until he is blue in
the face, but if prospects can find other
apartments for $750 his income will be
zero. On the other hand, if the landlord
demands $1000 per month, and the other
comparable apartments in the area are going
for about the same, then, as long as there
are enough tenants looking for a place, one
of them will pay the rent and move in. The
landlord is not gouging. He is obeying
market forces. Note also that the rent has
nothing to do with the cost of the
apartment, it has to do with what tenants
are willing to pay for their shelter.
Costs do not determine the
rent. Costs determine whether or not the
landlord remains in business. This brings
to mind the fable of The Moose Turd Pie,
immortalized in a folk song of that title by
Utah Phillips. In the early days of the
transcontinental railroads the
gandy dancers
were taken out many miles from the nearest
civilization. Their work trains consisted
of a bunk car, a tool car, and a kitchen
car, and they lived in the middle of
nowhere, maintaining the track for days,
until they were brought back One of them
was assigned cooking duties, which all the
crew hated. The unfortunate selectee did
not necessarily have any culinary skills.
His term was indefinite, or until someone
complained about his cooking. The
complainer then got the job and the
erstwhile cook was free to go to work with
the track gang. This is where Moose Turd
Pie came in. One cook was so frustrated he
baked such a concoction as a sure way to get
someone to complain. One of the men came in
and the cook thought he had succeeded when
the man shouted, “Gag! moose turd pie!” The
scheme fell through when the man had the
presence of mind to add quickly, “Good,
though.” You can lavish a huge expense on
baking a moose turd pie, spend hours
preparing it with a delicately woven crust,
and bake it to perfection. None of that
affects the price you can charge. Its price
is what people are willing to pay for it
regardless of how much it costs you, and
that being so, you will soon be forced to
drop it from your product line. What is
true for pie is true for rent.
It is clear that the landlord is
under an obligation to keep his rents at
market levels for the sake of his
investment. It is also clear that the
landlord need not brood about “gouging” his
tenants if he is, indeed, only maintaining
his rent at market levels. If he tries to
gouge, he will only create vacancies. This
does not mean that he should be oblivious to
considerations of tact. There are things
the landlord can and should do to make the
inevitable rent increase more palatable,
much as a parent will try to disguise a
child’s dose of mineral oil in a glass of
juice.
Two steps toward tact are
proactive. First, keep rent at or near
market. This obviates huge increases after
years of neglect. The tenant, at the
inception of tenancy, should be frankly
advised that he should expect occasional
rent increases because it is your policy to
keep rent at market levels. Explain that
this is the only justification you consider
for an increase. The second step is tied to
the first. Advise the tenant when,
approximately, he can expect an increase.
Most landlords like to review the rent once
a year, or perhaps every six months. This
would mean, for example, if the rent is
reviewed once a year and the tenant is
moving in during August, he can expect a
rent increase at about the following August,
if it is justified, but not in, say, in
June. This gives the tenant a sense of
stability and allows him to plan. If you do
this, however, stick to it, for the result
of breaking the guideline can be
devastating.
In addition to the proactive
steps above, there are some specific tactics
that you can use to control tenant unrest.
These are not “tricks” but proven ways to
keep the tenant anger problem, which is
inevitable, under control.
·
Never give all
your tenants a rent increase at the same
time. This is especially true of a larger
building or group of buildings, say with ten
or more units. It is far better space the
rent increases out over the course of the
year. You might want to eschew a rent
increase in December, because of the
Holidays, so consider arranging things so
that one-eleventh of your tenants get annual
rent increases each month. This avoids all
the tenants getting upset at once. If this
happens they will be more susceptible to the
blandishments of tenant activists who might
want to try to set up a tenant union or take
other expensive and inconvenient action.
·
Do not orally
warn tenants that they will be getting a
rent increase soon. This only leads to
complaints to Code Enforcement. Since there
is no record of your oral warning, a rent
increase after that will appear retaliatory,
which can lead to all sorts of unpleasant
consequences. If you want to give your
tenant time to gear up for the rent
increase, which we recommend, give him a
sixty day notice of increase instead of the
minimum 30 days required, or ninety days
instead of sixty, if your state’s minimum
requirement is sixty. In other words, give
more than the minimum notice the law
requires. Stick to the anniversary date,
however. If the tenant is scheduled for an
increase effective November 1, give the
notice September 1 instead of October 1.
This does two things. It gives the tenant
more time to gear up for the increase while
leaving no doubt that he was notified on a
specific date, and it also allows the tenant
to shop around and see if he really can get
a better deal elsewhere. If you have stuck
to market, he will find nothing better or as
good at a lower price. There are a number
of techniques for determining market rent,
but these are beyond the scope of this
article. Check your state’s law in the
Landlord Law Center if you are concerned
that giving extra time might not be
permissible.
·
If you have
been neglecting your rents and need to make
substantial increases, think about giving
them in installments. In other words, if
you need to increase the rent $200 on a
given unit, consider raising it $100 in
February and another $100 in May. Place
this information in the first increase
notice you give the tenant. Say: “There
will be a second rent increase of $100
effective May 1.” While we ordinarily would
not recommend such a procedure, the fact
that you have been negligent in maintaining
your rent justifies it. This also
illustrates why you have a duty, even to
your tenants, to keep the rents at market.
When the big increase does come it can
destroy the landlord – tenant relationship.
·
Be aware of the
timing of your notice. Notices that arrive
on December 24 will be less well received
than those that arrive on November 1, or
even December 1. Do not give the tenant his
annual rent increase the day after his
wife’s funeral. Be flexible enough to avoid
obvious gaffes.
·
Consider
bending the rules once in a while in an
appropriate case. If a proven good tenant
asks for an extra month to gear up for a $50
rent increase and has a good reason for it,
you may want to do it if you think it will
keep him around. There are three things to
remember if you do this: put it in writing;
let the tenant understand you are doing him
a favor you do not often do; and treat all
the tenants similarly situated and similarly
qualified alike, do not be arbitrary.
·
Take care of
your maintenance duties religiously. Do not
let a spasm of maintenance be an omen of a
rent increase. Allowing this trains your
tenants not to ask for needed repairs lest
their rent go up. This is a very bad state
of affairs from the landlord’s point of view
and could result in markedly higher
maintenance costs in the long run. Insist
that rent increases are not linked to
maintenance and repair, and then prove it by
sticking to the scheduled increases.
Regularly
scheduled rent increases, faithfully
executed, equal tenant longevity. “What?”
you ask. Yes. Except in the most volatile
of markets, and even in most of those,
regular rent increases that keep the rent at
or near market eliminate the need for the
huge increases that cause move-outs and
invite tenant action. Consider, in
addition, using the elements of tact we
discussed above to minimize the inevitable
ill will that any rent increase causes.
Related
Articles:
Rental Control Laws Chart - By State
Fifteen Disaster Prone
Management Strategies
Keeping Tenants Longer,
Part 1,
Part 2.
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