Increasing rent for current Tenants is a challenge for both new and experienced Landlords. While it’s often uncomfortable, the reality is that increasing rent for long-term, quality Tenants is something that all Landlords have to deal with at some point.
Not only is this process tricky to navigate, but many Landlords worry that increasing rent will result in losing good Tenants. But, there are things Landlords can do to make the process as smooth as possible and to reduce the risk of Tenant turnover.
Here are some tips on how to know when to raise rent and how to effectively communicate rent increases to Tenants.
How Do You Know When to Increase Rent?
Inflation, cost-of-living increases, and changes in real estate markets all impact rental prices. As a good rule-of-thumb, you can expect rental prices to increase between 3-5% every year, and some Landlords write annual rent increases into their Lease to account for this.
But, if you haven’t raised rent in a few years or want to get a more precise number for a rent increase, there are a few key factors that can help you calculate rent increases.
Market Conditions
The best place to start when considering a rent increase is rental market conditions. Do research on rental prices for comparable units in your area by looking at listings online, in local papers, or with real estate professionals. This should give you a good sense of the fair market value of your property and serve as a good indicator of whether or not a rent increase is needed.
Increased Expenses
While pricing your rental based on market conditions is key to staying competitive and retaining Tenants, it’s also important to take a close look at your annual expenses. After all, as these go up from year to year, you want to make sure that you’re continuing to make a profit off of your property.
Specifically, look for increases in property taxes, insurance premiums, HOA dues, property management fees, utility costs, and maintenance expenses.
As these costs go up, you need to recoup those expenses with higher rent, so it’s important to assess these expenses annually and increase rent prices accordingly.
Property Improvements
Beyond typical increases in expenses, if you do substantial improvements to your property, you’ll want to increase rent to help cover those costs. For larger improvements, you’ll need to spread the expense out over a number of years – for example a $5,000 improvement might lead to an $80/month rent increase that will let you recover the expense in 5 years.
Neighborhood Changes
Finally, significant changes in the neighborhood can warrant an increase in rent. For example, a new grocery store, new restaurants or shops, or improved public transit all make your property more desirable and support small increases in rental prices.
How Should Landlords Communicate Rent Increases to Tenants?
Once you’ve decided that rent needs to be raised and determined the right amount, the next step is communicating that increase to Tenants. This can be stressful, especially for Tenants that you have long-term relationships with.
From the outset, it’s important to remind yourself that you’re running a business and you have to make smart, albeit difficult, business decisions. With that in mind, you want to be courteous, professional, and firm in all communications.
Provide Ample Notice
It’s important to give Tenants’ plenty of notice before increasing rent, both as a courtesy and, in some places, to comply with state law. Generally, rent increases take place when the Lease is being renewed unless there is language in the Lease that states otherwise.
At a minimum, you should provide Tenants’ with notice of a rent increase 60-days before the Lease will be renewed. This gives them time to consider whether they want to renew the Lease while also giving them adequate time to give notice if they decide not to. Whenever possible, 90-days notice is even better.
Thoroughly Document the Rent Increase Change
You need to communicate the rent increase in writing with an Increase in Rent Notice. This document will provide Tenants with all the information they need, including a succinct explanation of why rent is going up, when the change will take effect, and how much the increase will be.
Additionally, the notice should remind Tenants of the need to provide notice should they choose not to renew the Lease. When drafting this, don’t forget to make sure you’re in compliance with all state laws.
Consider Making Incremental Changes
If you haven’t raised rent in a while, you might find that the fair market value is substantially higher than the current rent. If so, consider incremental increases – for example raising rent by $50 every 6 months for a couple of years – rather than overwhelming Tenants with a major increase all at once.
Visit ezLandlordForms.com
If you need to increase rent, visit ezLandlordForms.com to create an Increase in Rent Notice, that includes State Assist tips to make sure you’re complying with your state’s laws.
Some good ideas in this article.
I am in favor of rent or lease increases at the time of lease renewal. This allows the customer to evaluate his benefits from the rental, and understand the need for increase in rent, especially if improvements have been made or are promised to be made in the next year. If no improvements are ever made, or promised, I would expect disappointment and loss of customers.
Ya buddy, bet those Biden “voters” really like inflation! Well, computers don’t have feelings I guess 😂😂
“consider incremental increases – for example raising rent by $50 every 6 months for a couple of years”
LOL – in what world do you live where you consider $50/month increases every six months for a couple of years “reasonable”? If you are truly that far behind the going rate and suddenly feel the need to catch up, it would be more humane just to hit the existing tenant with a $200/mth increase at the next lease renewal. At least then they know you’re a poor property manager and can start looking for something better. When the unit is empty, you can hit the reset button and advertise for whatever you think you need. Don’t forget, tenants don’t usually see $50/month increases in their salary every six months for several years.
Great article. Thank you!