05 Nov Why Should Landlords Increase Rent Every Year?
Do you own an investment property? And if so have you raised your rent every year?
When I get hired by new clients or someone’s thinking of hiring us, the topic of rent increases often comes up. I learn they have not raised their tenant’s rent for a couple of years, 10 years in some cases because they “like the tenants”. They think the tenants are “good people” so, they have not increased the rent. I quite often wonder, do the owners understand the impact on the value of their investment property by not raising the rent? I thought I would write a short article to walk you through the impact of not increasing rent.
Here is a simple explanation of what would happen over the next 10 years if you were to raise your rent versus not raising rent.
We know inflation in the United States is averaging about 2.5%. So at a minimum, over the next 10 years, you would expect rent to go up 25%. If you do not raise rent at all, you’re going to lose 25% of your investment value over the next 10 years just due to inflation.
We also know that rent has been rising about 4% per year. In Philadelphia, we have been going up about 4%, but other markets like Seattle, Dallas, and San Francisco, are probably even higher. We have been typically advising our clients to raise their rent 4% to 5% per year.
This increase of 4% is largely a result of a large influx of renters over the last 10 years. A lot of people are no longer owning homes and have become renters. This trend will most likely continue over the next few years. Also, within the United States we have not been building enough apartments to keep up with the demand, so the result has been rising rents across the country.
So here is a quick example of the impact on the value of your investment property under three (3) different scenarios. Scenario 1 is no increase in rent, Scenario 2 is a 2.5% increase to keep up with inflation and the final scenario is increasing rents 4%. Here are the basic assumptions:
Rent = $1000
Building is valued at 100 times Rent – $100,000
Impact of Rent Increases for the next 10 years
• No Rent Increase – Building worth $100,000
• Rent Increase 2.5% – Building worth $124,886
• Rent Increase 4.0% – Building worth $142,331
You have one investment property and the rent is $1,000 per month. The value of the investment property is 100 times the rent, or $100,000. If you do not raise your rent over the next 10 years, the value of your investment property is still $100,000 (100 times a $1000 rent). If you were to raise your rent just 2.5% to try to keep up with inflation, the value of your building is going to be approximately $125,000.
But if you were to raise your rent to 4% per year, which has been the average rent increase in the Philadelphia area, over the next 10 years your rents are going to go up 42%. The value of your investment property is going to increase by 42% over 10 years.
So, if you want to keep the value of your investment property as high as possibly simply raise your rents.
So, what is the impact of a 4% rent increase over 10 years? We now know it’s 42% in terms of the value of your investment property.