Money is at the forefront of our minds more often than normal as Americans.
Inflation, down from its peak, still sits at 6% — well above the stated target goal of 2%. The job market, although still in a tremendous place, is slowing down and may have peaked as well. The stock market is still recovering with the S&P 500 down 17.5% from Dec. 31, 2021, to March 17, 2023.
It’s no wonder that rental property owners face a conundrum. Keep rent steady and you risk inflation and other factors eating away at your purchasing power and lifestyle. Raise rent and risk vacancies and a loss of rental income.
Should you raise the rent?
That’s what a listener of the Clark Howard Podcast recently asked.
Should I Raise Rent Right Now if I Charge Less Than My Neighbors?
Should I increase the rent price for my tenants?
That’s what a listener asked Clark on the March 22 podcast episode.
Asked Tenzing in Colorado: “I have a rental property that is due lease renewal in a few months. My wife and I are trying to decide if we should increase the rent. As it stands, the rent pays the mortgage and cashflows about $400 a month. Similar townhomes and apartments in the neighborhood rent over $100 more than what we’re charging.
“My tenants are a young couple. One ia finishing school and the other is an assistant manager at Hertz. We’ve had them for a year, and they’ve been very timely with their rent payment. We do not want to overburden them with higher rent. At the same time, would it be foolish not to increase rent? What would you do?”
This is a classic choice of risk vs. reward. In this case, the reward is something like $100 in additional rental income per month. The average one-bedroom apartment in Denver, Colorado, was going for $1,399 a month as of the end of 2022.
We don’t know exactly where Tenzing lives or what type of property he’s renting. But based on that figure, it’s possible that a single month without a tenant would eclipse the income that a $100 per month rental increase would produce in a year.
Would Clark Decide To Increase the Rent?
Not surprisingly, Clark takes a pragmatic approach to this question, with a side of business-sense nice.
“I would leave the rent as it is. If you were telling me that similar units are renting for $500 more a month, [maybe]. Yours is let’s say $100 under market. The cost to you of giving the tenants a reason to say, ‘Huh. Let’s go see what else is out there.’ That cost is far, far higher than $1,200 more in a year in rental income you’d have coming in.
“When rents are marginally higher with your competitors around you, there’s a benefit to being priced just a little lower in the marketplace. It makes your tenant more loyal. You reduce turnover.
“When that gap does get much larger, that’s when you have room to raise the rent and the tenants know, ‘Hey, this is still a deal compared to the general marketplace.'”
Keeping your rental properties occupied month after month, especially with people you respect and trust, is a major priority for many, including Clark.
“My thing always as a small landlord has been stability with tenants,” Clark says. “If I have a good tenant who pays well, I’m not getting crazy complaint calls about them, things like that. That’s the kind of tenant that I want. So that would be my suggestion and my advice.”
Final Thoughts
Sometimes less is more.
If you’re anything like me, you want to make as much money as possible. Especially during one of the more challenging financial times since the Great Recession.
Raising rent seems like a reasonable decision, especially if your property is cheaper than the local market.
However, you don’t want to risk a rental vacancy in order to get a marginal amount of additional income.
