Minding Business

Guide to Raising Rents on Your Commercial Property


As a landlord, raising rents can be stressful; these tips will help
Posted: September 05, 2019 by Anna Jotham

As a landlord, knowing whether or when to raise rents for your tenants can be confounding. You want to remain competitive and retain good tenants. Chances are, you also would like to maximize ROI and perhaps reduce turnover (which, frankly, eats up a lot of valuable time). With so many seemingly opposing objectives, it can seem challenging to determine what steps to take when it’s time to renegotiate a tenant’s lease.

It’s time to take a step back, and get the full picture of your property rental situation. Here are some tips to keep in mind when considering raising rents on your property.

 

Aspects to consider when renegotiating a lease agreement

How great is your tenant?

A great tenant can be worth their weight in rent increases—needless to say, you might want to hit pause before doing so. If retaining a great tenant is a priority for you, and you have a tenant who takes care of the property, communicates with you about issues and concerns, and pays rent on time, why would you want to jeopardize that by raising rents? You may want to hold the line on rent or keep increases to a minimum, while making sure they know how much you appreciate them. Alternatively, if you have a tenant who leaves, you may want to list the property for a higher rent so that the new tenant doesn’t encounter surprising increases in rent right out of the gate.

 

Typical tenant reaction to increases

When considering raising rents on your commercial property, you want to anticipate tenant reactions. And while no tenant looks at a situation the same as another, there are some benchmarks you can keep in mind.

- In general, if you are raising rents by 5% or less, tenants generally take that in stride as an expected increase.

- If you are raising rents between 5% and 10%, your tenants will likely start taking a hard look at whether the other aspects of the rental are worth the increase. What kind of amenities are offered? How does the location hold up? What condition is the property in, and is it well maintained?

- Raising rents by 10% or more? Tenants are likely to consider moving, particularly if your rent increases are outpacing those of others in the marketplace.

 

The true costs of increasing rent

It can be tempting to look at rent increases as an easy way to generate additional revenue, or cover rising costs. But it’s far more complex than that, and a wise landlord will conduct a cost-benefit analysis. Here are some hidden costs that you may encounter when raising rents.


- If your tenant leaves and a unit remains vacant, how much income will you lose per month?

- How much will marketing and advertising cost to relist the space? And is there a finder’s fee you’ll have to pay?

- What are the costs to turn the unit around for the next tenant.

Now, measure these costs against the anticipated additional income a rent increase will generate in a year. If the costs substantially outweigh what you stand to gain, you may want to hold off on an increase unless there are other compelling factors at play.

 

What the market can bear

As you consider raising rents, you’ll want to take a hard look at the local market, including the economy and similar rentals. Determine what people are paying on average in your market for their rental, and consider how your rental property compares. You may have additional amenities that are not offered by other properties, but this provides a good starting point for you. In addition, look at the economy locally, including the vacancy rates for comparable rentals and the unemployment rate.

 

Communicating with tenants is key

Whatever decision you come to when considering raising rents, communication with your tenants is vital. Be sure to show appreciation for their business, and communicate clearly the details of the rent increase and when it will be in effect. With all of the prework you’ve done to come to your decision, you should feel confident in your ability to address whatever surfaces as the outcome.

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