As a landlord, you face a difficult task: retaining tenants while making a profit. The rent should cover the cost of maintaining the home, but also give you something extra. This usually means rent increases on a regular basis.
It’s completely normal to raise the rent, but there are certain ways to do it so that you don’t lose tenants or struggle to rent your property if it becomes vacant. So, how much should the rent increase each year? While there’s no exact formula, there are certainly a lot of things to consider that can make it easier to decide exactly what to do.
Why raise rent?
The general costs associated with owning property can vary from year to year. Depending on property value, taxes, or even mortgage interest rates, the amount you owe won’t always be the same each year.
One of the simplest things you can do to protect your rental property investment is to raise the rent. Your property’s rental price should cover specific elements while remaining competitive in the market, including:
- property tax
- mortgage payment
- Management fees and insurance
- Maintenance and repair
If you don’t require tenants to set up their own utilities, then that cost should be factored into the rent as well. The same goes for HOA fees. If you don’t raise your rent, you risk cannibalizing your profits because you’ll still have to absorb these increased costs.
When to increase rent
While standard annual rent increases range from about 3% to 5% of total rent, there are times when increases are more appropriate than others. This isn’t something you just do on the first day of every new year. By then, some tenants will be in the middle of their leases. Instead, the best time to increase your rent each year is to wait until your lease expires.
This may put you into an inconsistent cycle of raising rent, but if you only have a one-year lease with your tenant, you’ll be sure that, at a certain time each year, you’ll be able to raise the rent if you want. And, regardless of the time of year, annual rent increases will help you stay competitive in the real estate market and ensure you’re never undercharged.
How to tell your tenants about a rent increase
The best way to tell tenants about a rent increase is through a letter. In fact, in most states, it’s required. As their one-year lease comes to an end, you should already have a letter ready asking them what their plans are. Are they moving? Will they stay? Will they sign another year-round lease or a month-to-month lease?
When you get answers to these questions, you should also mention how much the rent will increase under the terms of the lease below. Break it down by month to make it easier for tenants to manage increments. For example, if the rent is $1,000 per month and you raise it by three percent, tell the tenant that the monthly rent is now $1,030. It’s much easier to budget for thirty dollars than to see total growth for an entire year.
A rent increase notice detailing all of this information should be sent to the tenant well in advance of the lease expiration. Most landlords require tenants to give 30 days’ notice if they want to move out or renew their lease, and you don’t want to shorten your notice too close to that deadline. Since your rent increase may affect their choices, you need to provide adequate notice. Giving them about 90 days notice is ideal.
Be prepared to explain why
If you have a good relationship with your tenants and already know they will stay, raising the rent may feel awkward. And, while you ultimately have the choice whether to increase your rent each year, you’re not doing anything wrong.
To make it easier to ask for more money from your tenants, explain why you’re doing this. Let them know the percentage of your rent increase (and that it can be shared) within the national standard range of 3-5%. Also, let them know you’ve raised the rent by the exact same percentage the past few years so you can stay consistent.
It’s even okay to mention that this rent increase is to ensure you stay competitive in the local market. Owning rental properties is a business after all, and most tenants expect rents to increase slightly compared to this time last year.
What to do if your tenant complains
Even if you provide a proper explanation and give ample advance notice of the rent increase, if your tenants still complain, there are some things you can do.
- The sooner they renew their lease, the lower the markup they offer. For example, if they renew within 60 days, the rent will increase by 2.5%, but if they wait until 30 days, the rent will increase by 3%.
- Offer tenants non-cash incentives for lease renewal, such as gift cards to the nearest grocery store or popular restaurants.
- Educate tenants on why it is better to renew and charge a fixed-term monthly lease than to wait too long and switch to a month-to-month lease. On a month-to-month basis, you can increase your rent at any time with 30 days’ notice.
Responding to any grievances about these additional arguments should help tenants understand why you are raising the rent and whether what you are doing is reasonable. If they still don’t like it, they don’t have to stay. However, make sure you factor in how much more it will cost to move to your new place – first and last month’s rent, security deposit, etc. – rather than your small increase.
Unable to raise rent
Although it’s easy to raise the rent at the end of your lease, you may find yourself considering a rent increase at another point in time. Not all is well and you have to tread carefully when this happens.
- Local laws may set limits on rent increases, from how often they can be raised to how much they can go up. They may even specify the number of days you must provide notice. Most states also require that rent increase notices be given to tenants in writing, so don’t forget to send your letter.
- If the tenant’s lease states that the rent is for a fixed period (such as one year), you cannot increase the rent during that period. You must wait until the end of the lease term.
- When a tenant chooses to lease month-to-month, you can technically raise the rent at any time. However, you must provide appropriate notice of changes, usually at least 30 days in advance.
- You also cannot raise the rent as an act of retaliation. Rent increases are not a tool to force tenants out just because you don’t like them. This is illegal per se, but you could also cross the line and end up violating the Fair Housing Act.
To stay safe when raising your rent, check local laws and try to only make such changes at the end of the lease.
Set a rent that works for you
Ultimately, it’s up to you to calculate how much your property’s rent will increase each year. Taking into account all of your expenses, the rental housing market, and your profit margin will help you make your decision.
From there, make reasonable additions, and give your tenants adequate notice, and the transition should be easy. And if for some reason it doesn’t, you can always start at the new rental price when the next tenant moves into the house.
