I have managed rental investment properties for over 16 years which has given me the opportunity to speak with thousands of landlords; this has allowed me to see what techniques and mindset lead to being successful [which I define as building wealth through real estate] and the mindsets that lead to missed opportunities and increase expenses.
There are many mindsets as a real estate investor that can lead you to wealth or prevent you from achieving it, but for the focus of this blog we will look at one very common mistake I see repeated over and over again. The mistake of not raising rents to keep up with expenses.
Most times the conversation goes like this. Property manager asks the owner, “we recommend a rent increase, would you like us to implement it?”, to which the owner replies, “no, we have good tenants and I don’t want them to move out.” Now while this logic may seem sound at first glance, it is not considering several key facts.
First off, your expenses go up. Each year property taxes, insurance, repairs costs all increase. This means if you leave rents at the same rate for several years, you will be making less return at the end of the year. This can mean you are making thousands less then you were when that rental rate was first set.
Secondly, tenants rarely moved due to a reasonable rent increase. Now if you raise the rent an astronomical amount, then you may force a vacancy. But if you are just keeping up with the rental market, then the tenant would not be able o find a less expense property comparable to what they currently are renting.
You will need the increase reserves to put back into the home after occupancy. Since landlord cannot charge tenants for “normal wear and tear” you need to account for it in between tenant to keep your investment property in good condition. If you are short changing yourself on rents then you are depriving your investment of needed capital to stay in good condition [which directly effects the value of the asset].
I do understand that for many landlords they develop a personal relationship with the tenants and that leads them to not doing the things they need to do to be successful. The most common mistake is keeping rents under market value. If you are falling into this trap I strongly suggest you find a good property manager who can get your investment on the track to success.