Are Your Rents Below-Market? Here Are 3 Ways To Adjust Your Rents


Are Your Rents Below-Market? Here Are 3 Ways To Adjust Your Rents

Maddie and Isabella have identical rental properties—think Madame Mallory’s Saule Pleureur across the street from Hassan’s family restaurant in The Hundred-Foot Journey. The two businesses have a committed clientele, but when the market turns, one strategy determines their success or failure.

Maddie focuses on maintaining occupancy.

Meanwhile, across the street, Isabella watches market trends and decides to increase rent by 5%.

As a result, Isabella has tenants moving out, and her vacancies last for two months. Maddie stays full.

Over a span of 10 years, one business thrives, while the other struggles to keep tenants happy and maintain ROI. Can you guess which is which?

Believe it or not, it’s Isabella who, despite weathering turnover costs, earns more overall and sees more business growth—all because she increased rents with the market.

If you know you should be increasing rent to keep up with the market, but you’re feeling apprehensive, remember that there are times when it’s best to increase rent to maintain your business.

Raising your rent appropriately can actually mean happier tenants and a greater ability to scale your portfolio. We’ll help allay your doubts and explain how and when it’s appropriate to raise prices.

Why Below-Market Rents Happen in the First Place

You may find your rental prices have fallen below the market for several reasons, mainly because you haven’t updated your rent according to the changing market, or haven’t updated contracts according to your tenants’ actual situations.

Here are some cases where you could end up charging below-market rents:

1. Change in Ownership

One reason your rental prices may drop below the market rates is that you bought your property with tenants living in it already, like if you invested in a turnkey rental property.

Change in ownership commonly means a rent increase, and tenants expect that, so, don’t feel bad if you have to increase the rent—especially if the tenants haven’t had an increase in years or you’ve made improvements to your property.

2. Changing Market

Another reason your rent might fall below market is if you don’t increase your rent annually to stay up to date with market trends. Regularly increasing your rent by small amounts helps you stay at par with the market and avoids surprising your tenants with an unexpectedly large rent increase all at once, one that they may not be prepared to pay.

While you may be tempted to put off increasing your rent to avoid losing tenants, the reality is you’ll more likely lose tenants when you’re finally forced to make a large rent increase rather than increasing rent by small amounts regularly.

3. Long-Term Tenant on a Month-to-Month Lease

Lastly, you might find yourself charging below market for month-to-month tenants that end up staying long-term. Since there’s no renewal period or scheduled end date for month-to-month leases, a renter that stays for longer can easily go unnoticed, and the next thing you know, you’re charging below market.

If you find yourself in any of these situations—or you’ve just been putting off increasing rents for too long—never fear! There’s a way to get back on track.

How to Correct Below-Market Rent

Maybe you’re increasing your rent in step with market changes, or you’ve decided to make a larger increase because you’ve just inherited tenants who were paying well under the market rate. Either way, making the change sooner rather than later is the best way to maintain the health of your business and avoid larger losses.

But how and when should you do it? Here are the three best ways to increase your rent while minimizing  vacancy:

1. Research Rent Increase Policies for Your Area

Before you raise your rent, do your research to ensure you understand rent policies for your area. You can easily Google rent increase policy information in your area, so there’s no excuse for not knowing. Look for your region’s government website for the most up-to-date information, and follow market authorities for more explanation on policy changes.

In Michigan, there are no current restrictions on how much a landlord can increase rent. You wouldn’t want to overwhelm your tenants with a significant increase, either. You might scare your tenants away or force them out, and that leaves you with a vacancy to fill.

2. Do & Share Your Market Research

Here’s what we do, the 90-day start point has nothing to do with the law though!

Our goal is to aggressively & proactively pursue lease renewals to lower tenant turnover, thus improving the investment return for our owner-clients, via less frequent Rent Ready Repair and Vacancy costs.

Here’s a summary outline of how we pursue this goal.

90 Days Prior to Lease Expiration

  • Lease Renewal Reminder auto-emailed to all tenants on the lease, about the 60-day deadline to submit MoveOut Notice or the 12-month renewal @ 5% increase built into their standard LPM lease will automatically occur.
  • Annual Home Evaluation scheduled by our Inspections Department to determine:
    • Is tenant housekeeping acceptable, making them eligible for lease renewal?
    • If the tenant chooses not to renew, is the home in acceptable showing condition for marketing?
    • Video Timestamp and Scope of Work results shared with owner.
  • Market Analysis conducted by our Marketing Department to determine the current market rent for the home.
    • The analysis is shared with the Owner and tenant to establish rent increase parameters
  • Rent Negotiation message sent to the tenant(s):
    “Your current Lease with monthly rent amount of $xxx will end on mm-dd-yyyy. Homes similar to yours are currently renting for $xxx. Please see the attachment that supports this rent amount. Given this higher rent amount, please let us know how much of an increase you think is fair.”

    • If market rent is NOT higher than the standard 5% increase, an alternative message is sent.

70 Days Prior to Lease Expiration

  • Lease Renewal Reminder again auto-emailed to all tenants on lease.
  • Rent Negotiation continues with a 60-day deadline in mind.

60 Days Prior to Lease Expiration

  • Renewal Negotiation finalized by this deadline:
    • The new Rent Amount is updated in our system.

Write Your Rent Increase Notice

Besides the actual increase, there are proper ways to inform your tenants of an upcoming rent change.

Create a written notice, then send it to your tenants via email and mail. Inform your tenant in a respectful way and give them an explanation about why you must increase their rent. For example, you can say, “The property hasn’t increased its rent in the past 5 years and to keep up with the market rates…”

Specifically in Michigan, you must give a 90-day advance written notice, with a minimum of 30 days’ notice for the tenant to comment about the rent increase. This is just a quick glimpse of the policies, but check out the Rent Policy of Michigan for the full information.

Also, here’s a rent increase notice template that you can use to write your own.

At the end of the day, your investment properties are your business. Your written notice is meant to inform your tenants, not to ask or negotiate. So, be firm with your decision. You’re good to go as long as the rent increase is compliant with local laws.

3. Make a Plan for Future Changes

Now that you’ve decided to increase your rent to fair market value, create a plan so it doesn’t fall below market prices again. If ever it does happen again, you already have a go-to process that you can easily follow and you won’t have to stress.

Here are a few ways that you can do this:

  • Include rent increase in your lease agreement
  • Have a method of how you inform your tenant (mail, email, or both)
  • Have a template ready for communicating rent changes

If you follow this process, there’s no need to lose sleep over telling tenants you’re going to increase rent.

Increase Rent Strategically

Remember, it’s Isabella—the savvy rent-raiser—and not Maddie—the over-cautious under-charger—who makes the most profit in the end. So don’t be a Maddie! Raise rent the right way, especially if you’ve inherited tenants who are paying below market value, the market has shifted, or you haven’t kept up with rising prices.

These aren’t the only times you should increase rent, either.

For example, if you’ve just done major renovations on your property, it might call for a steep increase. Remember, your rates should be in line with market standards, so look at other properties similar to your own and consider your prices and your property’s condition compared to others.

Increase your rent when it makes sense with your situation and with the market to get the most profit from your investment. Just make sure that you do it the right way to avoid spooking your current tenants.

Are you looking for someone to manage your property in Metro Detroit? We’re a team of professionals that you can trust to take on that workload. Contact our Logical Property Management experts today and sit back and relax while we do all the work.

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