Why I’m Not Raising Rents As Fast As I Could

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Indexes
  1. Short-Term Thinking
  2. Long-Term Thinking
  3. Decency
  4. Conclusion
  5. My 6-Figure Passive Income Plan
  6. Why I Own 7 Houses But Choose To Rent
  7. The Best Way For Regular People To Get Rich
illustration of a house and a pile of money with arrows showing the two give each other
image by mohamed_hassan on pixabay

Today I received an email from my property management company that caught my attention. It was concerning a lease coming up on one of my single-family rental properties in Austin, TX.

Even with a management company, I always want to be involved in the important decisions, and setting rent is one of the most important.

For many years, rents in Austin were flat, and I was unable to increase at all, despite my costs going up every year (insurance, taxes, maintenance, etc).

But this year that is changing, and in a drastic way. Rents are starting to skyrocket!

For a nice house that currently earns $2,895 per month, the agent suggested I could get $3,500 per month based on recent rentals in the same area of similar age, size, and condition.

Wow! That is an additional $600 per month, or an increase of more than 20%.

Going from flat rents for years to 20% in one year is incredible, and is in line with the recent run-up in house prices in the area.

While I am enjoying the run-up in housing prices and the additional equity I now have, I’m not going to increase my rent by 20% in one year.

That’s too much, and not just out of concern for my tenant, which is real. Even from the perspective of a “greedy capitalist”, it doesn’t make good business sense.

Let me explain.

Short-Term Thinking

If I were only focused on the short term, trying to make a quick buck, then I would insist on raising the rents as fast as possible.

The market sets the prices, not me. For years when the market didn’t move, I couldn’t raise rents, so I could look at this as a chance to get some of that increase “due” to me.

But this is short-term thinking for several reasons.

First, it is always cheaper to keep a customer you already have than it is to get a new one. Tenant turnover is expensive (thousands of dollars), and the house could be vacant for a couple of months.

The potential loss could be around $10,000 as that tenant has been there a long time, so the carpet probably needs replacing and walls need painting, etc.

Even with a jump of $600/mo, it would take more than a year to make up for the potential loss between tenants.

Long-Term Thinking

I much prefer to invest for the long-term, like Warren Buffett. I own seven houses that I have purchased over the past 15 years, and I have yet to sell one.

Would you sell your Apple stock if it went up 5% in one day? Or would you hold it for decades knowing that it will likely go up 1,000% over time?

Like Buffett, I hold my investments “forever”.

My returns on long-term, leveraged appreciation have been spectacular, especially these past couple of years.

While I love the additional cash flow, a few hundred bucks a month is a drop in the bucket compared to the seven figures I made last year in equity buildup.

So what I really want more than a couple of hundred bucks a month is a good tenant that will take care of my property for me and pay me a reasonable price to do so.

Not only are my tenants my customers, but they are also my partners. They take care of my property (most of them, anyway), and they pay me a fair rent that gives me a bit of extra cash flow each month.

When I think about the relationship like this, I am not interested in pushing out good tenants for a rent bump.

The new tenants might sign up for the higher rent and then not pay, forcing me to go to court and evict them.

The new tenants might destroy the house and do significantly more damage than their security deposit covers. Good luck trying to get anything more out of them! I’ve been waiting for years to get what the last guy who messed up my house owes me.

Renters often don’t have anything to sue for in the first place, so it is just a loss that unfortunately becomes part of doing business.

Decency

Call me old-fashioned, but I still believe in human decency. I’m a free-market capitalist, but that doesn’t mean I believe anything goes.

Even if I didn’t focus on the long-term value of my investment, I wouldn’t increase the rent on a good tenant by 20% in one year.

It’s just not right.

Maybe 5%, maybe even 10%. But 20%?

Landlords often get a bad wrap, but we are people the same as tenants. Some are good, some are bad. Some are nice, some are not.

Not everything in life is about short-term profit maximization. There are human factors to consider on top of my belief that long-term investing beats short-term speculation over time.

How would I react as a tenant (yes I was and still am a tenant) if my landlord wanted to increase my rent by 20% in a given year? How disruptive would that be?

You may think most landlords would jump on the opportunity, but I disagree. Some will, but many will think about the tenant and cap the increase to something much more reasonable.

It doesn’t have to be a dog-eat-dog world, and you don’t have to be super aggressive to get ahead, in my experience.

Conclusion

In the end, I told the agent to go up just 3%, my standard maximum increase for good tenants when the market supports it.

People usually won’t move if the rent only goes up 3%, and I want my tenants (customers and business partners) to be happy and stay for a long, long time.

Of course, if a tenant leaves on their own, then I will put the house out at a market rate and catch back up. I’ll start the new relationship with a new tenant at a fair market price.

If a tenant is bad, and I would prefer them to leave, then raising the rent is one way to do it. This has never happened to me, the one bad one that I had left after one year (leaving me with new carpet that had to be replaced and new paint that had to be redone on his way), but it is the agreement I made with myself.

As long as a tenant pays rent on time and is a good steward of my property, I won’t push them out with rent increases.

It’s an unwritten rule I learned by one of my mentors and first property managers, and it’s something I still use successfully today.

Even in this crazy market with 20% rent increases.

Focus on the long-term, and don’t lose your humanity in the process. That’s my formula for successful investing.

I’m proud of the fact that I’ve built up significant wealth without having to resort to being a total jerk in the process.

I hope my tenants would agree.

Best of luck investing, and let me know how I can help!

Building Arks

After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.

I founded Building Arks to help busy professionals like you ignore mainstream advice and build real wealth.

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