Imagine if you will, your adult daughter keeps asking you to raise the rent on the rental house you self-manage. The current tenant has been there for almost 15 years. They don’t bother you by asking for upgrades or repairs, and you have never raised the rent. You figure you’re saving money on repairs and tenant turnover while your tenant benefits from lower rent. It’s less hassle, and everybody wins. Your daughter doesn’t agree with this approach. Is there anything wrong with this?
I’ll explain.
The Most Common Landlord Mistake You Have Never Heard Of – “The Covenant”
There is a common mistake that many long-time landlords make that we like to call “The Covenant”.
This “covenant” is an unwritten agreement between landlords and tenants where the landlord does not raise the rent and the tenant does not report any problems. This unwritten agreement usually remains unspoken, yet there is clearly an understanding between both parties.
How Does This Unspoken Agreement or “Covenant” Even Happen?
It’s easy to see how this arrangement starts to form. Landlords don’t like nagging repairs, turnover costs, and potentially more vacancies. Believe it or not, many landlords don’t like raising the rent. Some feel particularly uncomfortable doing so when they know the tenants. At the same time, tenants don’t want rent increases and prefer the landlord not to be nosy around the property.
So slowly over time, this unwritten, unspoken agreement starts to form. It is rarely intentional, seems harmless, and may even feel like a win-win situation.
Even though it may appear at first glance to be a good idea, there is a lot that can go wrong.
What Is the Harm of Not Increasing Rent While Using a “Hands-Off” Approach to Management?
So much can go wrong with this approach. We see this all the time as property managers because when things eventually go wrong, landlords reach out to us for our services. Some of what can go wrong include:
- Rundown property – Over the years, the property inevitably gets run down. It is common to see an unattended leak turn into an expensive mold issue. Small problems can grow into big ones. Tenants will put up with a lot to keep cheap rent. If the tenant is too quiet, there may be a problem.
- Unauthorized repairs and modifications – Your tenant may start making unauthorized repairs and modifications to the property themselves, which may be substandard and unwanted. When the tenant makes repairs, the landlord is still responsible for substandard work. We have even seen tenants come back to the landlord asking for reimbursement for expensive, unwanted modifications years down the road.
- Problems when you do raise the rent – When the landlord eventually raises the rent, the tenant who has never said anything before gets upset and suddenly reports a bunch of problems all at once. We have even seen tenants who have lived decades without rent increases be so upset when the rent is eventually increased that they run straight to the city to report issues without any warning to the owner.
- Accusation of retaliation – Sometimes, when the tenant reports significant issues that went unreported for years, the landlord will raise the rent to help offset the cost of making the repairs. This could be interpreted as retaliation for making the repair request, causing even more problems for the landlord.
- Limits on increases – Many properties have limits on how much the rent can be increased on an annual basis. If you are leaving the rent way below market as a way to avoid repair expenses, you need to realize that you may have significant limits on how much you can raise the rent in the future should the need arise.
- Bad for the next owner – Having a property with deferred maintenance and extra low rents puts the next owner in a bad spot. Even if you never plan on selling, whoever you leave the property to will inherit the problems as well.
- Lowers property value – A property with low rent and deferred maintenance is worth less than a property that is well maintained with rents close to market. You never know when you may want to sell or take out a loan on the property.
- Insurance issues – Insurance companies will deny claims and pull coverage from properties with deferred maintenance. We have seen mold issues that occurred because the tenant did not want to say anything, and the insurance company denied coverage because the problem was unattended for so long.
- Unhealthy dynamic – After years of neglect, tenants will often start to become quietly upset and resentful. They stay quiet since the rent is so low, but they are still upset. Then, when the inevitable day comes that the property is renovated and rents are increased, you will have a building full of angry people who can become problematic.
- Landlord liability – If something goes wrong, it will be the landlord’s fault. You can’t say I never raised the rent, so it is the tenant’s fault the place is uninhabitable. You will gradually become an accidental slumlord if you run a property this way. If someone gets hurt, it will be your fault, and your insurance company could deny coverage, claiming neglect.
How Common Is This Mistake?
The mistake of avoiding repairs and improvements while not making rent increases is very common with small apartment buildings and single-family residents, especially those that have been self-managed for many years. We see it so frequently while interviewing with people looking for a property management company that we gave it the nickname of the “covenant”.
How Do You Avoid Making This Common Property Management Mistake?
This dangerous covenant or unspoken agreement, where the tenant does not report problems and the landlord does not raise rent, can be avoided. There are two simple steps.
The first step is to keep rents somewhat in line with the market. An annual rent review is the easiest way to handle this. You don’t need to charge top dollar. There are real advantages to being a little below market. However, when the rent is too cheap, your tenant will become quiet, and the covenant will start to form. Do an annual review and make small adjustments as necessary.
The second step is to check in on the property and make repairs as needed. You don’t need to be excessive; it can be done around the same time you do your rent reviews. Checking in on the property every once in a while is a good thing. It is also important not to fight every repair. Keeping up a property helps protect your investment, is good for the tenant, and is the right thing to do.
Bottom Line
There is a common mistake that many landlords make we call the “covenant”. This is where the landlord and tenant, over time, develop this unwritten, unspoken agreement where the tenant does not make maintenance demands, and the landlord does not raise the rent.
This arrangement may seem harmless enough and maybe at first feel like a win-win, but over time, a lot can go wrong. Some of the things that can go wrong include you ending up with a rundown property that has unauthorized repairs and modifications. You may have problems when you do raise the rent, run the risk of retaliation claims, and have limited ability to raise rents in the future.
Running a property this way makes it less attractive for the next owner, lowers the property value, and may cause insurance issues. It creates a bad dynamic with the tenant, and all liability belongs to the landlord.
The covenant is a common mistake, especially with smaller self-managed properties. This potentially dangerous blunder can be avoided by keeping the rents close to the market and keeping your properly well maintained.
Thank You
Thank you, and we hope that you found this helpful and informative. Remember, we are not attorneys, so we don’t give legal advice. Laws are always changing and vary depending on the specific municipality in which the property is located. For legal advice, please consult a real estate attorney familiar with the laws in your area.
For Real Estate Advice
If you are looking for a reliable property management company to help you handle a rental property or a real estate broker to guide you through the sales process in Long Beach, Los Angeles, or Orange County, California, or if you are just considering it and have a few questions about real estate, contact the Mike Dunfee Group today! We are happy to help.
Dunfee Real Estate Services, Inc. DRE # 02026232
