Landlord needs advice on rent increase
August 19, 2016 2:03 AM   Subscribe

How do I find the balance between being Donald Trump and being a charity? I need advice on what might be a reasonable rent increase for a flat that I rent out.

I own a flat in London (in a gentrifying area) that I rent out because I live in the US now, it's managed by a real estate agency. I've had the same tenants for nearly 3 years now, and they've been pretty good. My old neighbours love them, they pay the rent, but not always on time. They work well with the managing agents when there are problems. So they're good tenants. I haven't increased the rent during that time.

The managing agents contacted me to say that the tenants want to renew the lease for a 4th year (2.5 months before the annual lease is up). The managing agents are also happy with my tenants, but they advised me that if I put the flat on the market now, they would advertise it at 115% of the current rent, and the lowest I could expect would be 112% of the current rent. So they asked me whether I wanted to increase the rent to reflect market values. I said that I value good tenants, but yes, my housing association costs for the flat have increased over the last few years. So I suggested what I thought was reasonable - a 5% increase in rent. That covers my additional costs, but is still way less than market value, but that's okay because I want to keep a good tenant. The tenant has pushed back to say they can't afford that increase, they can only afford a 2.5% increase.

So what should I do?

1. Take the tenant's compromise offer, possibly with a caveat that in 12 months time there will be another increase?

2. Stick with the 5% increase, knowing that that is more than reasonable given the market, and risk losing a good tenant? (Knowing that my managing agents could do a refresh, get it on the market, and get new tenants in at a much higher rent within 2 weeks is good to know. And this is realistic - the time from "advertised" to "move in date" was 5 days when it first went on the market - and the market is hotter now)

3. Other suggestions?

AAARRGGGGHHHH. This is is stressful for me. I'm not a charity. But I'm also not in this for the money. I need to find a balance and I need some objective advice. Hive mind - please help! Thank you in advance,
posted by finding.perdita to Home & Garden (33 answers total) 2 users marked this as a favorite
As a tenant, it seems reasonable to me when rents increase in line with the overall rate of inflation, and unreasonable when they increase more steeply than that. If I were a landlord, I concede I might view the situation differently.
posted by misteraitch at 2:29 AM on August 19, 2016 [1 favorite]

Bear in mind that a tenant who can't afford a 5% increase after 3 years and even now has trouble paying the rent in time will probably not be able to stay in that neighborhood of London much longer, and at the very least, their financial position will get worse. That said, odds are they would look at the 5% increase and realize that it is cheaper to pay it than to move.

Alternately: a 2.5%-3% increase each year for the next 3-5 years would help you steadily increase the rent to a point where you are better able to cover your expenses as well as easing the tenants into it. Gives both of you time to prepare: you to make long term plans for new tenants and them to figure out how to handle their finances in the wake of higher expenses.
posted by deanc at 2:30 AM on August 19, 2016 [16 favorites]

Try looking at it in dollars or pounds instead of percentages, and see whether that clarifies things. I have no idea what the rent might currently be, but I have the impression that London is stupidly expensive. If you're at $2000/month now then the difference between a 2.5% increase and a 12% increase would be $2280 over the course of a year. Is it worth $2280 (or whatever the number works out to) to keep this particular tenant for one additional year?
posted by jon1270 at 2:41 AM on August 19, 2016 [1 favorite]

I am not a landlord, I have been a tenant.
- It's fair to put the rent up a little after 3 years.
- The managing agent have a vested interest in increasing the rent since they, I assume, get a % of the rent? So of course they will exaggerate how much you could get and want you to put the price up. In my experience letting agents are money grabbing scum. Don't forget if you put it on the market they will be gouging you and the new tenants for credit check costs, inventory costs, cleaning costs, and all that bollocks. So of course they want you to put it on the market.
- A good tenant is worth money to you, they are a known quantity. An unknown new tenant could be a pain in the arse and/or cost you money.
- The only reason you're putting the rent up, AFAICT, is because the agency told you you should (see above re: their motivations).
- I'd say go with the 2.5% increase with the proviso you may increase again in a year. Maybe they will move out in a year, but they may well move out anyway if you stick with 5%.
posted by EndsOfInvention at 2:41 AM on August 19, 2016 [12 favorites]

Yeah, I'm threadsitting. jon1270 - I chose to use % because I'm not asking for people to tell me what rent I should be asking for, I'm asking for advice about how to deal with a rent increase. (I don't need distractions from people in SF telling me how cheap my rent is, or from people in Birkenhead telling me how expensive my rent is - by using percentages, I'm hoping to get a wider perspective.)
posted by finding.perdita at 2:53 AM on August 19, 2016 [2 favorites]

Oh, I understand that. I wasn't suggesting you post hard numbers here, just that you think in those terms privately as a way to gauge what's at stake.
posted by jon1270 at 3:01 AM on August 19, 2016 [1 favorite]

5% is reasonable. 2.5% or 3% this year with a further increase next year is also reasonable. Don't underestimate inertia - it is a massive pain in the arse to sort out a move and expensive when you take into account moving costs and new tenant checks and all that other bullshit that letting agents are somehow allowed to charge you for. If your tenant is complaining they can't afford the increase they're definitely going to have issues with moving costs.

I have also been a landlord and I know how fucking awful it feels to fuck with your tenants' lives but this is what the agency are there for, they can be the bad guys and do the comms.

(I am, now, basically in your tenant's shoes, having been renting an undervalued flat for several years in a gentrifying area of London, except I always pay my rent on time. If my landlords were to rent my flat out again they'd easily get a 25% increase on what I pay, but I am a goddamn model tenant and it's in their interests to keep me. They put my rent up by just under 5% last year after 4 years which worked out at £50 a month and I was grateful it was only that, but even double that would be significantly cheaper and easier than having to sort out a move and a new deposit and somewhere I like that will let me have my cats.)
posted by corvine at 3:10 AM on August 19, 2016 [2 favorites]

I'm a renter in an inner-city Australian neighbourhood and 5% after ~5 years seems like a more than reasonable increase, even for "good tenants". Good tenants can't expect zero-increases in rents in places like London year-on-year. As long as you are keeping up with the necessary non-tenant-responsibility maintenance, which it sounds like you are. They have pushed back, which is a standard negotiation technique. Go for 3.5%. Or 4%.
posted by esto-again at 3:14 AM on August 19, 2016

They don't always pay on time? And you call them good tenants? You must have been really burned in the past.

I say go for the full 115% that the rental agency is suggesting, if your tenants can't handle 5% in 3 years they couldn't afford it in the first place.

PS. I suggest this even as a current tenant. I've been at my current place for 5 years with no rent increase. I'm almost about to suggest to my landlord that the rent should go up, which seems super weird.
posted by TheAdamist at 3:21 AM on August 19, 2016

5% after ~5 years
5% is reasonable. 2.5% or 3% this year

All these rules of thumb are rubbish and indicative of amateur landlords / people with zero economic undertstanding. Rents should inflate with rental inflation and demand. If rental prices are falling in London, then by holy god do not increase rents.

What are market rental prices in your area? More importantly, what are market prices for good tenants? Professional tenants pay less than the advertised Zoopla/ Rightmove indicative rents. I know, because I have always paid less rent than what was advertised. Professional couples have a lot of leverage because they can pay rent on time and they are usually good tenants. Rich international students can pay more money, but ... are students. What is your counterparty risk and how much are you wiling to pay for less tenant risk?

What is the rental prices doing? In London area where I am, they have increased 2-5% year on year, BUT have recently been falling due to Brexit. I saw 10% discounts from last year prices advertised on Zoopla. Do you want to increase your rents, and then decrease them a year later?

Your tenants should pay what the market value is. However, you are allowed to give discounts based on how valuable they are to you. They are good tenants? £100-£200 per month or 5% is a good discount for a good tenant. IF you don't think they're good tenants, then don't give them a discount.

Note also that agents have every incentive to tell you that market rents have increased. They get to charge more fees. I paid £400 in 'admin fees' everytime I move. I don't pay a fee when I renew a contract. If they don't get the rent they promised, then they'll just 'advise' you to reduce your rent. No loss for them. But you have lost some time, energy, and a tenant.
posted by moiraine at 3:29 AM on August 19, 2016 [7 favorites]

The managing agent have a vested interest in increasing the rent since they, I assume, get a % of the rent? So of course they will exaggerate how much you could get and want you to put the price up. In my experience letting agents are money grabbing scum. Don't forget if you put it on the market they will be gouging you and the new tenants for credit check costs, inventory costs, cleaning costs, and all that bollocks. So of course they want you to put it on the market.

I cannot agree on this enough! Agents thrive on turnover. You don't.
posted by moiraine at 3:34 AM on August 19, 2016 [9 favorites]

Another way to look at this is that, if your flat turns over, there are costs associated with that. If your tenants have been there for a few years, there is a very good chance that you'll need some downtime to do deep cleaning and maintenance. It's not uncommon to allocate a month so that you've got plenty of time to do the work and call in pros that a handyman can't deal with. That means a month without rent and with additional outlay. Obviously this cuts into your income stream. 1 month without rent is 8% of your yearly take and then cleaning/repair/showing fees.

If you spent that money, and really buffed the place up, you'd see a significant increase in rent that would persist going forward. How long would it take for you to recoup that cost? How much better off would you be one, two, five years from now?
posted by Sublimity at 3:51 AM on August 19, 2016 [3 favorites]

Until recently I was renting a flat in a large UK city, not London, owned by a private landlord and managed by a letting agency. My rent went up by 2% every year, over the 4 years I lived there. When I moved out they advertised it for rent at 115% of what I was paying. A 5% increase at once seems steep and I can see why your tenants are annoyed. I'd agree with those saying that you should increase it in smaller increments but more frequently.

Also agree that letting agents are money grabbing scum and only want what's best for themselves, they are not concerned with the best interests of either you as a landlord or your tenants. But also I paid my rent on time. Not paying on time makes me question how good your tenants actually are.
posted by maybeandroid at 4:00 AM on August 19, 2016 [3 favorites]

Being of a suspicious mind id ask if the tenants are late or the agent is only claiming they are late. 2.5 sounds reasonable, but if you're going to raise it more than 2.5 next time (say, three), tell them now so they have time to look.
posted by tilde at 4:04 AM on August 19, 2016

Lifelong renter. I would say that tenants who do not pay on time are by definition NOT good tenants. Raise it 5% so long as you have the time and energy to go through getting it re-leased.
posted by arnicae at 4:07 AM on August 19, 2016 [1 favorite]

Is it possible that your tenant is just trying to negotiate their rent increase? I've heard that's become more common recently, and since they've offered exactly half that makes me think they are trying to lowball you. You may want to counter with 4% and see if they'll accept it.
posted by possibilityleft at 4:41 AM on August 19, 2016 [4 favorites]

Speaking as a tenant who aggressively negotiates his rent and is in a similar position to your tenants... you should respond strongly to this negotiation.

* Time is on your side. Technically the landlord's negotiating leverage generally increases as you get closer to lease expiration date, but in the London market, your leverage will always outweigh theirs. You are definitely far enough away from expiration date that you run little risk of going rent-less for a month (and thereby wiping out any gains from an increase).

* Good tenants aren't a dime a dozen but they are absolutely plentiful in a place like London.

* This isn't a friendship. You're not asking them to do anything other than not trash your place, which is standard issue behavior.

* They've gone THREE YEARS without a rent increase. Cumulatively, they've saved a bundle over the years and also going forward over the period of any future leases, if you want to think of it like that.

I agree that you should think of it privately in cash terms, including retroactively. Even $50 a month over 3 years is $1800, which is either "nothing, who cares, better to have nice tenants" or "the cost of lawn maintenance for a year," depending on your perspective and how your brain treats money. :)
posted by RJ Reynolds at 5:04 AM on August 19, 2016 [5 favorites]

Every time I rent an apartment, this is what I do:

1) cruise Craigslist in the area to see what the market rent is for similar places
2) look the property up on my county board of assessors website to see the most recent purchase price and the property tax assessment

I use the info from 2 to get a general estimate what the actual cost of the unit is to my landlord is every month (mortgage + taxes) and use the info from 1 to see if the difference is (what I consider to be a fair amount) for upkeep/maintenance and profit. If it's wildly out of range, that gives me reason for pause.

I have used this before when landlords have raised the rent on me and it's worked in my favor.

I'm also an excellent tenant, though. Never late and generally early with my rent payment, rarely complain about stuff because I don't like having people in my home, keep pretty quiet, don't break shit, etc. Landlords want to keep me, so negotiating is less risky for me.

Anyway, were I a landlord I'd do a very similar thing to determine rent increases. What is the market rent for similar units in the area, how much am I in for per month on the unit, and does that difference net a reasonable profit for me.

p.s. good tenants pay the rent on time
posted by phunniemee at 5:12 AM on August 19, 2016 [3 favorites]

Lets assume you're renting at £20,000 a year. A 5% raise is an extra £1000, and a 2.5% is an extra £500 over that year.

If your current tenant moves out and the flat sits empty for just a week, that'll cost you around £400 in lost rent, on top of that you might be obligated to pay for a cleaning crew and do some maintenance that's been on the books for a while but the current tenants didn't care too much about.

So, in my shoes, I might just say 3.5% to keep everyone mostly happy-- then assume I'm £700 richer by the end of the year compared to raising it 5.0% and potentially being only £200 richer because it sat empty for two weeks.
posted by Static Vagabond at 5:21 AM on August 19, 2016

You need to look at rents in your area and investigate that yourself, you can't trust the agent.

If rents are rising then no increase in all that time is pretty sweet deal for them and they should've expected this day would come. I was a good tenant who stayed 7 years in my last place and I got increases every year. I nearly cried with gratitude each time that it was only an increase because in my area it was common to serve notice on the existing tenant so they can be kicked out and a higher paying tenant moved in (there was a ceiling on how much the rent an existing tenant paid could be increased each year).

Of course in less insane areas I could have said, uh, over this and moved. But here that would have meant racing around trying to beat out 40 other people at each place I inspected for the privilege of paying about 30% more. In other areas it would've been civilised and tenants had choice.

Paying rent on time is a pretty low bar for 'good tenant' status and yours aren't doing that. I would look at the market and decide based on that. If the market favours landlords then losing them won't be a tragedy, If it favours tenants, be willing to consider their counter offer.
posted by kitten magic at 6:09 AM on August 19, 2016

Stick to the 5% increase, but give them a 2.5% discount for paying on time.
posted by robocop is bleeding at 6:24 AM on August 19, 2016 [6 favorites]

robocop is bleeding has a good idea. My apartment has a rental cost that is less if I pay before the fifth of the month. Maybe give them a specific number of days into the month that if they pay before that date they pay the 2.5%, but after that it is 5%?
posted by winna at 7:16 AM on August 19, 2016 [2 favorites]

As a tenant, I'm surprised you're even considering going below 5%. Check the market if you don't trust your agents to give you a good price, but it seems like your offer was already more than fair.
posted by katrielalex at 7:32 AM on August 19, 2016 [2 favorites]

If you don't want to stand firm at 5% (which I think is a perfectly reasonable increase in this situation), offer 3% with a clause that increases rent to a 5% level increase for the term of the lease if there's even a single late payment. Credit cards ding a nice APR of there's a single late payment, why not do the same?
posted by quince at 8:08 AM on August 19, 2016 [2 favorites]

Although I don't live in London, I do live in a US city with a crazy housing market. I expect my rent to go up each year, and would be insanely happy if I'd gone 3 years with ZERO rent increase. A 5% increase to make up for that seems more than reasonable, and if the tenants do move out, I would guess you'll easily re-fill the space unless there's something dramatically wrong with it. Obviously do a little online sleuthing to make sure your agents aren't totally off base in their estimate, but I would guess it's reasonable.

I would also stop thinking about these people as good tenants - they aren't even paying rent on time? I'll grant you they're not nightmare tenants who are destroying your property or something, but paying rent on time is a pretty basic characteristic of a good tenant in my book.
posted by rainbowbrite at 9:37 AM on August 19, 2016 [3 favorites]

I'm in a gentrifying area in the US and my landlord didn't raise my rent for almost 5 years. I consider this good fortune on par with winning the lottery. They recently went up 10%. While this was annoying, looking around at the market I consider myself damn lucky, and after years of no increases I was expecting it anyways. I know it hurt a few of my neighbors here more than me, but still, the cost of moving plus "market rate" for rent around makes even a 10% increase look like a steal. No one moved out over it. If you rent you can't expect to pay the same year on year with no end, nature of the game. In my opinion 2-5% is well within the range of not-asshole landlord behavior when the alternative is an eviction and being thrown to the wolves to pay double or more elsewhere. I can certainly empathize with people who have trouble paying even a minor rent increase, no one wants to do it, but I also own a business and understand that inflation and costs go up every year regardless of how good the client/tenant relationship is.

However it doesn't matter what my personal feelings are about it, and I definitely did not say what I just typed to my landlord. I attempted to negotiate as best I could with the little leverage I had. I would never just agree to a rent increase, no matter what or how small, I would push back. Consider that it's not the % that matters to them, but security in their own home and feeling like they have some say in a crazy market. Maybe all they want is to be able to say to their friends, "Yeah the market is crazy but at least my landlord was a nice enough guy to talk to us about it like a human." Especially when dealing with a soulless management company that's usually trying to squeeze every dollar out of their properties.
posted by bradbane at 9:56 AM on August 19, 2016 [2 favorites]

Stand firm at 5%. You don't actually know if they can't afford it - they might be bluffing. If they move out, raise it 10% for the new tenant. Even if it sits empty for a bit, when you find a new tenant you will recoup the loss easily, and if you can't find a new tenant within a very short amount of time, you can reduce the rent back to a 5% increase. In the future, raise it up by a smaller amount (~2%) each year so that it's less of a price shock.
posted by permiechickie at 10:00 AM on August 19, 2016 [2 favorites]

Tell them that because of your own financial obligations, you need to raise the rent by 5%. If you find out they're actually ready to leave, you can backtrack and say it's 2.5% if they pay on time, and more than that if the rent is late. Also tell them now how much the rent will go up at the beginning of the next rental term.

I know it's very stressful to have to chose a new renter who may or may not be a "good" tenant. But the current one is going to have to leave in the next few years anyway because they're already stretched near their financial limit.
posted by wryly at 12:20 PM on August 19, 2016

Don't look at it as a one time increase, think of it as a policy shift. Going forward review the rent every year. Small changes are easier for tenants to swallow over one large. Increase it 2.5% per year until you hit market parity.
posted by blue_beetle at 12:29 PM on August 19, 2016 [1 favorite]

I'm a landlord asking myself the same question. My tendencies are similar to yours. (When I listed the place, it was the second cheapest flat with X bedrooms in our neighborhood, despite being freshly remodeled and quite nice.)

Putting on my renter hat, I think a 5% increase is fine. 10% might be noticeable and a bit troubling (as would be 5% two years running), but 5% every few years seems reasonable to me.

I think, in your shoes, I'd probably either accept 2.5% or counter-offer 3%, with a warning that it will go up again in six months or a year (and maybe again the year after that). That's reasonably kind to them (they can have time to plan; you're still asking below market rate) while being more fair to yourself.

For reference, you might look at what rent control ordinances allow. In Oakland, the allowable increase is 2% this year, but if a landlord has "banked" prior year increases, as you have, the increase can be up to three times that. This suggests to me that your 5% increase is reasonable, if you want to stand behind that.
posted by slidell at 1:11 PM on August 19, 2016

This doesn't address your immediate concern, but I'd like to suggest an approach you could take to make this easier on both parties in the future:

Out in commuter-belt Hertfordshire, the contract I signed as a new tenant at the end of 2011 stated that the landlord would raise the rent each year by the rate of inflation (as measured at a specific date) plus, at the landlord's discretion, up to 1% more. I really liked knowing that the rent wouldn't skyrocket (barring something horrific happening to the economy), and I imagine the landlord appreciated being able to send me the rent increase letter each year without any guilt or anxiety. I stayed for four years, leaving when I'd found a place to buy; the rent went up each year, but never by enough to make me flinch. In total I think it was about 8% higher when I left than when I moved in.
posted by ManyLeggedCreature at 5:19 PM on August 24, 2016

Thanks all. I've gone with a 3% increase as my final offer, and while I hope my tenants stay, if they don't, I know that I can have it refreshed and new tenants in within 2 weeks (my area has a crazy rental market, even with Brexit). A lot of you pointed out that regular small increases are better than infrequent larger increases, and that's great advice that I will take going forwards. Thank you!
posted by finding.perdita at 12:44 AM on August 29, 2016

By the way, I had my facts slightly wrong on Oakland's rent control. I now believe the max increase in one year is 10%, if a landlord banked past increases for instance, but the law is in flux, so I might still have it wrong.
posted by slidell at 10:46 PM on August 30, 2016

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