Landlord Lesson #2 -Why You Should Always Increase Your Rent

Published on 21st November 2019

Notice to Reader – I must warn you that this Insight Article may spark some controversy for anyone who is NOT a landlord. But alas, I have to share this insight with landlords. For tenants, it’s a terrible feeling when your landlord increases your rent (and I can empathize as a former tenant myself), but from the other side of the coin, increasing the rent is something that ALL LANDLORDS MUST DO.

Addressing the Elephant in the Room – Most people are afraid of being landlords and are anxious about the whole notion of dealing with tenants because they think it’s all about fixing toilets at 3:00 AM in the morning. Oftentimes, these large mental roadblocks stop them from actually being invested in building some serious side hustle money. This Insight Article is meant to equip you with some tips and tricks, so that you can become a more confident landlord and investor.

One of the biggest tips is to ALWAYS increase your rental rate (when you can). This is a MUST. I often get a lot of push-back from clients on why they don’t want to increase their rent when the renewal period comes along. Typically, the reason is that they have a good tenant in their property and they don’t want to lose them, or the cost of filling the unit is too much (learn more about how to fill a unit, step-by-step, in the link below). I wouldn’t want my tenant to be upset either (this is a valid reason), but allow me to explain why you should be charging ahead and leave the emotions behind.

READ: HOW TO FIND THE PERFECT TENANT

It’s All Business – I’ve always told all of my clients that they should treat investment properties like a business. To some, this may sound really cold and harsh, but you have to remember, you’re the one carrying the cost of your investment property.

  • When taxes go up each year, you pay;
  • When condo fees go up each year, you pay;
  • When insurance goes up each year, you pay;
  • If interest rates increase, you pay.

That’s a lot of payments you’re responsible for. So if you don’t increase your rent, then who will be responsible for covering these rising costs? Without increasing your rental rates, all of these price increases will eat into your monthly cash flow, and maybe even put you in the negative.

When the minimum wage jumped by a few dollars in 2017, the cost of labour increased. Guess what happened as a result? Business owners went on to increase their prices so that they could still hit their profit targets. Unfortunate for buyers, but this is standard practice because you need to retain margins in order to continue the business.

The Message – If you’re afraid of negotiations or afraid to have that hard conversation with your tenant, then you can say something along the lines of this via whatever communication method you prefer – see below.

Dear Best Tenant in the World,

As you know, your lease will be coming up shortly. Thank you very much for taking care of my property so far. If you would like to continue staying at 123 Main Street, unfortunately, the new rent will be X. As you know, my monthly costs have increased due to taxes, insurance, and inflation. Let me know if you wish to stay at 123 Main Street. Please let me know your response in a week’s time.

If they agree to your proposed rent increase, don’t forget to use the Landlord and Tenant Board’s N1 form. Here’s the link to that form: N1 Form 

In the Numbers – If you’re an empirical, numbers person like me, perhaps a few numbers will help explain how much money you’re losing by not increasing your rent. This year, the maximum allowable rental rate increase is 1.8%, and although 1.8% doesn’t feel like it can add up to a lot, keep in mind that you can compound the rental increases each year.

Below is a chart for you to see how much money you could be losing by not increasing your rental rates:

This example uses a $2,000 rental property, which is basically a junior 1-bedroom unit in downtown Toronto. Over the first year, if you don’t increase the rent, then you lose almost $2,000 in the first year. However, over the course of 5 years when compounded, that’s over $20,000. That’s not a small amount by any means.

Secondly, if you have a vacancy, you should always increase your rent to at least the going market rent. In our current market, I always recommend listing the property above the market rent because I’ve been doing this for a while now and the rental demand is so strong that there is a high likelihood that someone is willing to pay above the market rent.

The Wrap – Ultimately, you should always increase your rent by the allowable amount. If you have a vacancy, you will want to increase it higher than the market.  More on that to come in the coming week but the underlying reason is the higher the initial base rent, the better off you will be in the future because you can only increase it by approximately 1.8% per year. Leaving it empty for one month and getting a much higher rental rate is going to pay off in the future. If you take the emotions out of real estate investing and treat it like a business, then you’re on your way to building your very own real estate empire!

Until Next Time, Happy Real Estate-ing,
Zhen
Zhen@PrimePropertiesTO.com

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