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Rent Increase Etiquette

© Copyright  2000-2011

Keeping rent at market level is part of the landlord’s duty.  He owes this duty to his investors, partners, potential heirs, and himself.  The rent collected, especially in buildings of four units or more, largely determines the value of the property.  “Collected” is the key word here.  What might be collected is irrelevant.  A landlord who allows his rent to slip substantially below market is allowing his property to deteriorate just as surely as one who lets the roof deteriorate or the floors rot.  This implies that raising the rent as needed to market levels is as important a part of maintenance as fixing roof leaks or unplugging toilets.  It also follows that the only justification for a rent increase is to bring the rent to market level; that gouging the tenant has no part in the calculation.  Once this justification exists, the landlord need have no fear of a tenant move-out or even rent control.  If the tenant moves out, then the landlord will soon have another tenant if he is demanding market rent.  If rent control comes, it was coming anyway, whether the rent was raised or not.  Politics, not rent increases, causes rent control.  It is better to be collecting market rent and using the extra money to participate in political organizations that can block rent control.

            Your tenants will always hate a rent increase, no matter how large or small.  I recall during one of the innumerable energy crises of the 1970s seeing a TV ad by some political pressure group showing people parked by a business that looked remarkably like a gas station.  But the people were wearing breathing masks and instead of filling their gas tanks were filling air tanks.  The narrator asked how we would like it if big companies could charge for air.  The implication was that if we need air and it is free, then gas should be free, or at least the oil companies should be told what to charge for it, because we need it also.  Of course, it was demagogic.  There are plenty of tenants and political activists who hold the same delusion about rent.  Just as gasoline does not refine itself and move voluntarily to the markets where it is needed, buildings do not build and maintain themselves.  The oil company is entitled to sell, and the landlord is entitled to rent, at such price that people are willing to pay them, and, it is hoped, realize enough to cover their costs and make a profit for their own subsistence.

            But who sets the price?  Who sets the rent?  The truth that some tenants and tenant activists dislike is that tenants set the rent.  No landlord in history has been able to gouge more rent than some tenant was willing to pay.  The landlord can demand $1000 per month until he is blue in the face, but if prospects can find other apartments for $750 his income will be zero.  On the other hand, if the landlord demands $1000 per month, and the other comparable apartments in the area are going for about the same, then, as long as there are enough tenants looking for a place, one of them will pay the rent and move in.  The landlord is not gouging.  He is obeying market forces.  Note also that the rent has nothing to do with the cost of the apartment, it has to do with what tenants are willing to pay for their shelter.

            Costs do not determine the rent.  Costs determine whether or not the landlord remains in business.  This brings to mind the fable of The Moose Turd Pie, immortalized in a folk song of that title by Utah Phillips.  In the early days of the transcontinental railroads the gandy dancers were taken out many miles from the nearest civilization.  Their work trains consisted of a bunk car, a tool car, and a kitchen car, and they lived in the middle of nowhere, maintaining the track for days, until they were brought back   One of them was assigned cooking duties, which all the crew hated.  The unfortunate selectee did not necessarily have any culinary skills.  His term was indefinite, or until someone complained about his cooking.  The complainer then got the job and the erstwhile cook was free to go to work with the track gang.  This is where Moose Turd Pie came in.  One cook was so frustrated he baked such a concoction as a sure way to get someone to complain.  One of the men came in and the cook thought he had succeeded when the man shouted, “Gag! moose turd pie!”  The scheme fell through when the man had the presence of mind to add quickly, “Good, though.”  You can lavish a huge expense on baking a moose turd pie, spend hours preparing it with a delicately woven crust, and bake it to perfection.  None of that affects the price you can charge.  Its price is what people are willing to pay for it regardless of how much it costs you, and that being so, you will soon be forced to drop it from your product line.  What is true for pie is true for rent.

            It is clear that the landlord is under an obligation to keep his rents at market levels for the sake of his investment.  It is also clear that the landlord need not brood about “gouging” his tenants if he is, indeed, only maintaining his rent at market levels.  If he tries to gouge, he will only create vacancies.  This does not mean that he should be oblivious to considerations of tact.  There are things the landlord can and should do to make the inevitable rent increase more palatable, much as a parent will try to disguise a child’s dose of mineral oil in a glass of juice.

            Two steps toward tact are proactive.  First, keep rent at or near market.  This obviates huge increases after years of neglect.  The tenant, at the inception of tenancy, should be frankly advised that he should expect occasional rent increases because it is your policy to keep rent at market levels.  Explain that this is the only justification you consider for an increase.  The second step is tied to the first.  Advise the tenant when, approximately, he can expect an increase.  Most landlords like to review the rent once a year, or perhaps every six months.  This would mean, for example, if the rent is reviewed once a year and the tenant is moving in during August, he can expect a rent increase at about the following August, if it is justified, but not in, say, in June.  This gives the tenant a sense of stability and allows him to plan.  If you do this, however, stick to it, for the result of breaking the guideline can be devastating.

            In addition to the proactive steps above, there are some specific tactics that you can use to control tenant unrest.  These are not “tricks” but proven ways to keep the tenant anger problem, which is inevitable, under control.

·        Never give all your tenants a rent increase at the same time.  This is especially true of a larger building or group of buildings, say with ten or more units.  It is far better space the rent increases out over the course of the year.  You might want to eschew a rent increase in December, because of the Holidays, so consider arranging things so that one-eleventh of your tenants get annual rent increases each month.  This avoids all the tenants getting upset at once.  If this happens they will be more susceptible to the blandishments of tenant activists who might want to try to set up a tenant union or take other expensive and inconvenient action.

·        Do not orally warn tenants that they will be getting a rent increase soon.  This only leads to complaints to Code Enforcement.  Since there is no record of your oral warning, a rent increase after that will appear retaliatory, which can lead to all sorts of unpleasant consequences.  If you want to give your tenant time to gear up for the rent increase, which we recommend, give him a sixty day notice of increase instead of the minimum 30 days required, or ninety days instead of sixty, if your state’s minimum requirement is sixty.  In other words, give more than the minimum notice the law requires.  Stick to the anniversary date, however.  If the tenant is scheduled for an increase effective November 1, give the notice September 1 instead of October 1.  This does two things.  It gives the tenant more time to gear up for the increase while leaving no doubt that he was notified on a specific date, and it also allows the tenant to shop around and see if he really can get a better deal elsewhere.  If you have stuck to market, he will find nothing better or as good at a lower price.  There are a number of techniques for determining market rent, but these are beyond the scope of this article.  Check your state’s law in the Landlord Law Center if you are concerned that giving extra time might not be permissible.

·        If you have been neglecting your rents and need to make substantial increases, think about giving them in installments.  In other words, if you need to increase the rent $200 on a given unit, consider raising it $100 in February and another $100 in May.  Place this information in the first increase notice you give the tenant.  Say:  “There will be a second rent increase of $100 effective May 1.”  While we ordinarily would not recommend such a procedure, the fact that you have been negligent in maintaining your rent justifies it.  This also illustrates why you have a duty, even to your tenants, to keep the rents at market.  When the big increase does come it can destroy the landlord – tenant relationship.

·        Be aware of the timing of your notice.  Notices that arrive on December 24 will be less well received than those that arrive on November 1, or even December 1.  Do not give the tenant his annual rent increase the day after his wife’s funeral.  Be flexible enough to avoid obvious gaffes.

·        Consider bending the rules once in a while in an appropriate case.  If a proven good tenant asks for an extra month to gear up for a $50 rent increase and has a good reason for it, you may want to do it if you think it will keep him around.  There are three things to remember if you do this:  put it in writing; let the tenant understand you are doing him a favor you do not often do; and treat all the tenants similarly situated and similarly qualified alike, do not be arbitrary.

·        Take care of your maintenance duties religiously.  Do not let a spasm of maintenance be an omen of a rent increase.  Allowing this trains your tenants not to ask for needed repairs lest their rent go up.  This is a very bad state of affairs from the landlord’s point of view and could result in markedly higher maintenance costs in the long run.  Insist that rent increases are not linked to maintenance and repair, and then prove it by sticking to the scheduled increases.

Regularly scheduled rent increases, faithfully executed, equal tenant longevity.  “What?” you ask.  Yes.  Except in the most volatile of markets, and even in most of those, regular rent increases that keep the rent at or near market eliminate the need for the huge increases that cause move-outs and invite tenant action.  Consider, in addition, using the elements of tact we discussed above to minimize the inevitable ill will that any rent increase causes.

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Keeping Tenants Longer, Part 1, Part 2.

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