How to Raise Rent Effectively
Increasing the rent on tenants may be almost as challenging as asking your manager for a raise.
The difference is that you usually have to justify your reasoning to your manager, yet you do not have to do so with your tenants, even if you have many valid reasons, like:
- Raising insurance premiums
- Rises in taxes
- Maintenance fees which increase
- Increasing homeowner association dues
- Cost-of-living increases
You do not have to explain your finances to tenants. All you have to do is inform them in writing that there’ll be an increase in rent and what it is going to be.
It is understandable that you may be hesitant the first time you are getting ready to present your tenant with an increase in rent. You may be hesitant to rock the boat, concerned that your tenant may leave.
If you actually follow these tips, it’s possible to eliminate the majority of the angst from increasing the rent, and you will start to think of this process as just another regular aspect of being a landlord.
Automatically include a slight increase in rent at each period of lease renewal
The majority of tenants expect a small rent increase during renewal time of perhaps $20 to $50 or so. However, if you spring a $200+ increase on them after not increasing the rent for 5 years, you will probably receive some negative feedback. A rule of thumb includes raising the rent around 3 to 5% a year.
If you have a great tenant that you’re attempting to convince to renew, you may want to waive the increase if they’ll sign for one more year. Because after all, it’s always possible to make up the difference by increasing the rent when she/he finally moves out. If you do this, it is recommended that you spell out that you are waiving the increase this year.
You may agree that a great tenant is worth a lot more than an increase in rent, however, expenses and inflation do rise, so small increases at least every other year, even on great tenants, are reasonable.
Know market rates
Your expenses do not dictate what you ought to charge for rent; the market will. You cannot expect to keep the tenant if you are charging substantially more than other likewise rentals around you.
But so long as the rental rates are in line with other likewise rental units in your area, you professionally and tactfully give the tenants a notice of rent increase, and you follow the rent increase laws, you will wonder why you ever stressed out about this process.
Actual Rent Comps
The best method of determining the market rate is by searching ACTUAL rent prices of comparables within your area. Utilizing actual “rent data” is much better than “listing price” data because one is actual, and another is projected.
There still are some other fantastic data sources, albeit, they utilize listings details. Nevertheless, check Apartments.com, Craigslist, and Rentometer to find comparables and the realistic market price.
Send out a notice 60 days before the end of the lease
Sending out a letter for a rent increase this far ahead of time informs you of what a tenant’s intentions are. If she or he does not plan on renewing a lease, you’ll have time to begin marketing and showing the unit without having a vacancy period.
Within your rent increase letter, which it’s possible to send through email or regular mail, thank them for being such fantastic tenants. Compliment them on their good characteristics, like taking care of the property or paying their rent on time.
Next, get right to the point and say that you have to raise their rent. You’re not required to give any reason at all, however, it is advised as it paints a clear picture of your motivation. If you have a concrete financial reason, such as increased utilities, dues, or taxes to back this up, do include this as an explanation. If you are raising the rent because property values have gone up, or you just know you can demand a higher rent, it is risky to say this as it comes across as greedy. If you have 2-3 comparable properties on your block that are well above the current rent, and it has been many years since the increase, it can potentially be convincing to share that reason; otherwise, avoid it.
State that you’re increasing the rent as little as you can, and that you hope they’ll remain with you.
You will have to state what their new rent will be and date it becomes effective, which could be the day after their lease ends.
If there’s a fixed-term lease, you should attach or include a new lease with the email or letter. Ask that the tenant read their new lease, sign it and return it to you. Explain that you have underlined or highlighted all changes, like the increase, and that everything else stays the same.
If there’s a month-to-month lease, your tenant will not have to sign a renewal since it’ll automatically renew each month.
Know the law
Though the property is officially yours, you cannot increase the rent however much you want if the place is rent-controlled, or if there’s a statute limiting the amount of increase. Plus, you cannot increase the rent whenever you want if there is a fixed-term lease.
If the tenant signed a lease, you cannot increase the rent until a lease period is up. Here’s the only exception: if a lease states that it’s possible to increase the rent within the lease period – yet, even so, it’ll negate the concept of a “fixed” lease and is frequently not permittable in court.
If the tenant is on a monthly basis, it’s possible to increase the rent after providing the right notice for your state, which usually is 30 days, yet varies by state. The notice must be in writing, and unfortunately, all verbal agreements with the tenant generally will not stand up in court if it’s argued.
Note that you cannot increase the rent in a discriminatory way because you do not like a person’s sexual orientation, religion, or race. Neither is it possible to increase the rent because you recently made some necessary repairs to the property or punish the tenant for complaining to the city regarding a code violation.
Within many states, if the tenant filed an official complaint to the government authority, exercised a legal right, or been involved in a tenant’s organization, then you’re limited from increasing the rent for an established time period. Most courts will assume “retaliation” by a landlord if negative action is taken upon the tenant from 60 to 180 days after all of the previous tenant actions.
Peter Evering, a property management and real estate expert, is the Business Development Manager of Utopia Management. With a hands-on presence throughout San Diego California and Nevada, Utopia Management has been providing professional rental property services since 1994, at some of the lowest rates available.