If you’ve ever lived in a large apartment complex, you likely adapted to a particular rhythm: each year, as your lease came up for renewal, you’d also face a rent increase. To continue living in the property, you would be expected to pay more, supposedly to keep up with inflation.
Now, though, you’re in the position of power. You’re the one who has to take stock of your properties, the state of the economy, and your local market and decide whether to increase your rents. And, perhaps more importantly, you’re the one who has to decide between increasing rents and selling your properties entirely if they’re not profitable. What do you do?
As a Houston-area property owner, you’re in a competitive area, one where prices are on the rise overall, but if your expenses aren’t going up, raising your rent may not be in your best interests. At the same time, Houston is an expensive city – depending on your profit margins before, you may not be able to absorb any reduction in income. Only you know your particular financial situation, but whatever the situation, some basic pricing rules apply.
Know Your Tenants
One of the most common reasons that independent landlords are hesitant to raise rents on their properties is that they have smaller portfolios, so they also have less room to absorb the financial hit from a vacant property. These landlords are haunted by the question of whether to raise rents on good tenants – tenants that you trust to take care of your property, who pay on time, and who you have an established rapport with – and risk losing them to less expensive housing or even pricing them out, or to keep rent the same and cut your profit margins.
When deciding whether to raise the rent on your current tenants, it’s also important to evaluate what kind of market your properties reach. You may be working within the broader context of Houston, but Houston is a big market, one with a real shortage of affordable housing. In fact, this shortage is impacting the entirety of Texas. That means that if you raise the rents on typically lower-cost housing, you’re more likely to displace your tenants, than if you’re renting out luxury or higher-end properties, and it’s important to recognize this distinction.
Know Your Portfolio
Another major consideration for landlords wondering whether they should raise rents on their properties, take a loss, or just sell, is the question of portfolio composition. If you own multiple rental properties, you don’t need positive cash flow on every one of them. For example, sometimes you’ll be doing repairs or upgrades on one property that will make profit next to impossible. Similarly, in a diverse property portfolio, higher-end properties will almost always yield greater profit margins than more affordable rentals. What you really need to do is ensure that you have overall positive cash flow. Done correctly, negative cash flow on one individual property’s cash flow shouldn’t make or break your financial picture.
Know The Rules
When deciding whether to increase the rent on your properties, it’s important to keep in mind the rules about rent hikes. Generally, if your tenant pays rent month-to-month, you have to provide written notice 30-days before increasing the rent. The notification must be in writing, and cannot be verbal. For tenants renewing a longer-term lease, you are within your rights to increase the rent starting with the first month under the new lease. Overall, Texas provides minimal guidance for increasing rent, allowing landlords to increase rent by any amount.
When To Sell
Knowing all of the above, how do you determine when you should sell instead of increasing the rent on your properties? It’s obviously a difficult calculus, both literally and professionally. Being a landlord comes with a lot of unseen expenses, from property taxes to maintenance professionals to legal costs, and you need to determine whether your income from your properties is sufficiently offsetting these. How much would you need to increase rent to manage your own costs? If you’re looking at substantial rent increases, it may be untenable for you to keep operating those properties based on your current portfolio.
Some landlords have managed to maintain their properties by restructuring their fee schedule, identifying specific costs like trash collection or previously included utilities and charging for them individually. Most of these fees are mandatory – they are essentially rent – but they can make cost increases seem slightly more reasonable to renters, especially if you do end up facing tenant turnover. Many owners with larger property portfolios do this and have been successful. You also have the option to do this on some properties to create a financial buffer that will support more affordable housing.
Sometimes it’s necessary to put one or more of your properties on the market, but be prepared that it can take some time to sell, and your income from that may or may not recoup your costs, depending on how much debt you’re carrying. This is also a good reminder that you should be keeping a close eye on your cashflow patterns and debt load, since you want to sell before you’re in debt from your properties.
Originally Posted By Green Residential