Keeping rents at market level is critical
to maintaining the value of your investment. The rent collected in a multi-residential
income property largely determines the value of the property. When
the time comes to sell your income property, prospective buyers are going to assess
the purchase price against its income and operating expenses.
As a real estate agent, I can show prospective buyers data regarding the
potential rental income, but nothing speaks louder than the actual rental income
being collected. Having
tenants that are paying market level rents are a valuable asset when selling a
residential income property.
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.
I highly recommended that you renew
leases, or at least rent rates, annually and adjust your rents accordingly to
maintain tenants that are paying market level rents. Advise new tenants
that you review rents once a year and adjust according to market levels. This
obviates huge increases due to years of neglect. While tenants hate rent
increases, small increases that come on the yearly anniversary of their tenancy
are more tolerable.
By tying rent increases to the anniversary of their tenancy you also tend
avoid raising the rents to all your tenants at the same time, risking multiple
vacancies or multiple upset tenants. You also avoid the perception that the
rent increase is somehow linked to some maintenance or repairs that you are
doing for the tenant or the overall property.
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. Notify the tenant of the second rent
increase at the same time as the first increase so the tenant can plan
accordingly.
Under California Law there is
currently no maximum limit for rent increases. However there are regulations
that must be followed.
- If the tenants have leases, the leases carry over to your new ownership. The rent cannot be increased during the terms of the lease unless the lease provides for rent increases
- If the rent increase or cumulative rent increases are greater than 10% of the lowest rent during the past 12 months, you must give a minimum of a 60 day notice.
- If the rent increase or cumulative rent increases are 10% or less than the lowest rent during the past 12 months, you must give a minimum of a 30 day notice.
For specific details on advance
notice requirements please refer to the California Landlord Tenant Guide which
can be found on the California Department of Consumer Affairs web site at www.dca.ca.gov.
Local rent control ordinances may
also limit rent increases, or impose additional requirements on landlords. If
your investment property is in an area with rent control, check with your local
rent control board to find out what additional restrictions apply.
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