Rent Increase – An Easy Boost To Cash Flow

Nobody likes a rent increase. Except for the landlord.

For too long, my rental property has been squeaking by on meager cash flow. Check out my monthly investment income updates and you’ll see the regular income it generates is about $70 per month. That’s a positive number so I can’t complain too much. But in the real estate investing world, it’s crap.

On the plus side, that $70 is after all expenses. So even when something goes wrong that requires a fix, my positive cash flow remains steady because I’ve set aside sufficient funds for repairs and expenses.

Condo ownership reliably causes a few unnecessary headaches each year. Last month the association charged me $260 to paint a rusty railing that was done poorly the first time. I could’ve done it myself for about $10. So I wasn’t happy about that, but that’s the nature of condo rentals.

Surprises like this are part of the reason why I’m considering selling my condo next year when my tenants move out. They’ve suggested they might leave after 4 years of residence and flawless rent payment but are still trying to figure out their life situation.

Why A Rent Increase Now?

My tenants are ideal. They have two incomes, are highly educated and morally outstanding people in my judgment. So am I putting at risk this convenient situation by hitting them with a rent increase? I don’t think so.

They’ve lived in the condo for nearly four years and I haven’t raised the rent. It’s overdue, especially since rents have increased so much in the Washington D.C. metro area. They know that.

Rents have increased due to rising incomes. Surely over the past years, my tenants have experienced raises in their income far beyond my rent increase.

According to Zillow, the new rent level is still below market rates. I didn’t want to raise the rent too much or a trivial amount. So I increased the rent by $50 per month or $600 per year. This was a reasonable amount for the tenants to adjust to, and enough to buffer any upcoming increased recurring expenses (i.e. higher HOAs and taxes).

Ultimately, I’m raising the rent now because I can and I need to so my head stays above water.

Why Did I Wait So Long?

Four years is a long time to keep rent flat. In hindsight, I wish I had built an automatic annual rent increase of 1%-2% per year into the lease. That would have made things easy.

Frankly, I was a little nervous about a rent increase because I have a good personal relationship with the tenants. We are friendly.

I really just didn’t have the guts to man-up and break the news to them. Then something changed my perception.

Recently, I’ve been listening to podcasts during my daytime work commutes. The podcast subject matter available is so vast now and everything is right at your fingertips. I use the Stitcher app for iPhone.

One of my favorites is the BiggerPockets podcast. It’s a weekly show about real estate investing. The hosts Josh Dorkin and Brandon Turner interview regular real estate investors from all around the country. Topics include flipping houses, wholesaling, landlording, creative financing and how to find excellent deals.

The benefits of listening to the show go far beyond real estate investing. It’s also about productivity, good business practices and entrepreneurship.

While going through the backlog of podcasts, one of the hosts or a guest said something that struck me. I already knew it, but the bluntness of the statement kicked me in the ass.

It was something like “Hey, you’re running a business here. It’s not about being friends with the tenant, it’s about making the most of your investment. If the numbers say you need to increase the rent, you should do it without hesitation.“

And just like that, it clicked. It was time to raise the rent.

How I Went About Raising the Rent

The first thing I did was read the lease to make sure a rent increase was within the boundaries of our agreement. It was.

Even though my tenants are cool and I didn’t expect any problems, I wanted to make sure I did it the right way. So I googled ‘rent increase letter‘ or some variation of that, and came up with some guidelines. I also checked out some blog posts on BiggerPockets.com

I didn’t want to come across as super-formal because I do have a personal relationship with the tenants. Plus it’s 2015, so sending an actual letter would be too stern. Email was fine.

So I drafted the email based on the recommendations in the various articles I found on the internet. The main points I wanted to convey to my tenants were:

• Thanks for being great tenants and always paying on time.
• The rent is going up $50 effective the first day of 2016.
• Taxes and HOA fees have steadily increased while rent has been flat.
• The increase is the lowest possible amount.
• Rent is still below market rates.

The notice went out more 60 days prior to the effective date. I felt this would help alleviate the burden. It’s also far more lead time than stated in the lease and complies fully with the law.

I stated that the email was the official notice and asked them to reply with an ‘OK’ to give me a record of their acceptance of the increase.

In the reply, I also received some information about their future intentions. As a young married couple in the midst of quickly moving careers and family aspirations, I’ve always assumed their housing needs would change on the sooner side. The reply gave me some insight into their plans which helps me with planning, especially if I want to sell it or not.

They sort of acknowledged they may be leaving in the summer as I suspected. Though nothing is set in stone.

Bottom Line Impact to F12MII

Revenue for my property will increase by $600 per year. Accounting for allowances, the move increases my forward 12-month investment income (F12MII) by $552.

This number shows the income power of a rental property. I’d need to invest $18,400 in new capital in dividend stocks yielding 3% to achieve the same increase. Instead I accomplished it with one email.

If I decide to keep the rental beyond this tenant, the market rates suggest there’s another $50-$75 of rent increase I could add on for a new resident. That additional income would be nice, but I’d rather keep my current tenants than risk a new one or face a vacancy. Or, cash out. But I need to have a professional take a look at the tax implications before selling.

The new F12MII amount will be reflected on my monthly income report for December.

Have you ever had to raise the rent on a great tenant? Has it ever backfired? Anybody out there considering buying a rental property soon?

Craig Stephens

Craig is a former IT professional who left his 19-year career to be a full-time finance writer. A DIY investor since 1995, he started Retire Before Dad in 2013 as a creative outlet to share his investment portfolios. Craig studied Finance at Michigan State University and lives in Northern Virginia with his wife and three children. Read more.