How Landlords Can Raise The Rent Without Feeling Guilty
Many of my actions are driven by guilt. I’m constantly asking myself how I could be so lucky when there are so many folks just struggling to get by. My trip to India ten years ago made me stop overeating given all the poverty I saw. If I can’t help them, at least I won’t disrespect them through gluttony.
Even small, innocuous things are constantly being driven by guilt. After being up 4-2 in the second set against my friend Jaabir, I decided to tank the match just so he wouldn’t have to pay the $20 bet he initiated. I felt bad taking his money given he’s already down $140 this year alone. Lest you think I’m the one egging him on to bet, I’m not. He’s got an undesirable thirst to smack talk, while I have a consistent desire to defend my honor whenever challenged.
I absolutely hate raising the rent on my tenants because I feel bad. Although San Francisco rents went up by an estimated 12-15% in 2012, I only raised my tenant’s rent by 3%. My tenant is kickass awesome and to ask her for more money just felt dirty. The only time I do raise the rent is when there is turnover, which doesn’t happen too often.
One of the main reasons why I wrote, Renters Should Pay More Taxes is so that I could get over my guilt of raising rent. I’d much rather have the tenant pay the government directly for an increase in property taxes rather than through me. I wanted renters to get agitated by the notion of a “Renters Tax” where a renter sends in an annual check to their local assessors office twice a year based on the amount of rent they pay. This way, renters can directly experience the discomfort of paying for unnecessary spending and maybe, just maybe there will be less legislation that passes that sticks it to homeowners since we are the 30% minority.
It’s easy to spend another person’s money on yourself. With a Renters Tax, we all share in the burden of new government expenditures voted on by the people and will therefore think more carefully about the next legislation that proposes to raise taxes. The counter argument is that renters are already partially paying property taxes through the rent they pay. I realize this, but this is only true in a perfectly free market.
If there were no restrictions to the amount of rent a landlord could charge, and if landlords were not human beings with guilty consciences, but robots who could automatically adjust rent prices based on algorithms that measures current supply and demand, then a Renters Tax is not necessary. Unfortunately, a good portion of landlords do feel guilty. My fellow landlords I’ve surveyed all say that guilt is their #1 reason for not raising the rent to market rates. The #2 reason is rent control. If you own a multiple unit building in San Francisco that was built before 1970, a landlord can only raise rent by an index earmarked to inflation e.g. 1-3% a year.
If you read the fiery comments from the Renters Should Pay More Taxes post, you’ll see that renters bristle at the idea of paying more taxes just like homeowners. Hence, I think I’ve created a understanding between homeowners and renters where everybody who votes for more spending is willing to pay more taxes and therefore higher rents.
CHARGE WHAT THE MARKET CAN BEAR
Based on the comments from the Renters Tax post and my experience as a landlord for the past 10 years, I’d like to present the following reasons as to why every landlord should always raise their rent as much as possible.
* Renters don’t mind higher rents. I’ve always gone under the assumption that as a renter, it would be better to have lower rents than higher rents. Based on the amount of legislation that has passed to increase spending on things like multi-billion dollar bullet trains to LA from SF we don’t need, I am wrong in my assumption. Renters believe they are definitely paying their fair share of property taxes through the rent they pay. Given increased spending legislation that results in higher property taxes is strongly supported by renters, it is only logical to conclude that renters do not mind higher rents, otherwise they would stop voting for legislation that ultimately raises property taxes and therefore rents.
* Never sell yourself short. If the market is paying $100,000 for your talents as an engineer, you wouldn’t accept $80,000 to do the same work as others who earn $20,000 more. If the market says renters are willing to pay 15% more this year than last year, you’d be silly to accept $3,000 a month when you can get $3,450 a month. By not charging $450 a month more, you are robbing yourself of financial freedom down the road. Maybe $450 could be used take care of your own family, provide braces for your kids, or help someone in desperate financial need. If someone wants to pay you $3,450, then go for it.
* Property owners take risk. Every asset class carries inherent risk. Property is no different as we’ve seen in recent years. It takes a lot of discipline to save up for a 20% downpayment. I had to live in a studio apartment for two years with another fella in order to save 50% of my after tax income out of college. There’s also no guarantee you’ll ever see your money again once you deploy your funds into your first property. The only risk a renter faces is no return on their rent and being a price taker to ever rising rents. Renters are free to move with a standard 30 day notice and have no stake in the game. Landlords don’t invest in property for charity. Landlords invest in property to make a return. If there is risk, there needs to be reward.
* Sharing the burden feels wonderful. One of the reasons why renters don’t mind paying higher rents is because renters believe just like homeowners that a better educated youth provides for a stronger society. Supporting our children is one of the most powerful reasons used to pass legislation that increase taxes. There is great pride in everybody pitching in to pay more taxes. In addition to public education, property taxes are used to pay for local infrastructure, firefighters, and police officers. We should not rob our tenants of the right to help contribute to society in the form of higher rents.
* Utilize a property manager. If you pay someone to manage your property, make sure your property manager earns his keep by charging market rates. The property manager should shield owners from as much hassle and contact from the tenant as possible. Property managers usually charge 1-1.5 months worth of rent for their services a year. Get your money’s worth.
* Make your tenants aware of the market. You don’t want to wake up 15 years from now and realize you are charging 40% below market rent because you felt too guilty to raise prices over the years. It will be impossible to catch up if your unit is under rent control. When it’s time for you to raise the rent, simply highlight as many comparables as possible you’ve found online justifying why the rent is going up. Make your tenants feel good by not charging up to the maximum, but perhaps 95%.
* Set expectations early. If you are getting a new tenant, highlight your rent increase plans. I make it a point to let all my tenants know that one of my condos is not under rent control and that I have historically raised rent once every two years, but not by more than 5%. Once your tenant’s expectations are set, so long as you don’t increase your rent sooner and higher than what you’ve said, they should be fine.
WE ARE STRONGER TOGETHER THAN APART
Renters need good landlords who are attentive to their needs. I’m always very responsive when something breaks in one of my properties because I want my tenants to have the best experience possible. I even have a system where I give my tenants a handyman resource sheet and authorize them to charge up to $100 per job without the need for my approval. So far, I have loved every single one of my tenants and they have loved me back in return.
Landlords need renters to help pay their mortgage, provide retirement income, and build wealth over the long term. As a retiree with no W2 income, rental income is now more important than ever for my survival. It’s in my best interest to provide the best quality product so I can earn the highest return. If I ever get rich enough, I might even convert the rental into a furnished pied de terre where my family and I can stay for several months a year and not even bother with tenants.
To all the landlords out there, take a look at the latest comparables online and see what they are going for. Raise your rents to match market rents and stop feeling guilty. Renters have given landlord’s their blessings with their support of legislation that increases spending. If we can get the increased tax revenue efficiently funneled to those programs which need the most help, I’m all for rising property taxes and rent. Together we can build our cities stronger one tax payer and one rent payer at a time.
Recommendations For Building And Protecting Your Wealth
* Refinance Your Mortgage: If you are a homeowner or landlord and you have not refinanced in the past year, I strongly suggest you check online to see what the latest rates are and refinance your mortgage. I always check with Quicken Loans because they are fast, quick, and provide a no obligation real quote based on the input you provide. I recently refinanced to a 5/1 ARM for 2.625% in the Summer of 2012 after just refinancing in the fall of 2011 for 3.125% from 3.625%. Refinancing before renting out your property is crucial because rental property mortgages are 0.5% higher on average than primary home mortgages.
* Get the best home insurance possible. In order for your property to grow in value you must protect your property from damage. Fires, floods, leaks, theft, and other accidents happen all the time. If you have cut-rate insurance, you could very well pay way more than you should. I highly recommend checking with USInsurance.com online to find the best home insurance rates. They have a huge network of providers that will compete against each other to provide the most tailored home insurance coverage possible that is affordable. Mobile home insurance, renters insurance, condo insurance, and homeowners insurance are just a few of the options based on the type of home in which you reside. Leverage the internet to save money and protect your largest asset.
* Check Your Credit Score: For tenants, take a moment to check your free credit score through GoFreeCredit.com, a company I trust. If you are in a hot rental market, or really want a particular rental, you should have your credit score as part of your application for your landlord. I am a multi-property landlord and highly value a credit score and report. Those who come to me with their credit score stand out above others who don’t. If you do not want to pay for the credit monitoring, simply cancel within the grace period.
Photo: Condo in Guaraju Sao Paulo, 2013, FS.