As a landlord, you obviously have a vested interest in your properties and want to do whatever you can to maximize profitability and enjoy the highest ROI possible. Sometimes this means increasing rent prices to account for new costs or increased demand. However, you can’t just arbitrarily increase rents whenever you want. There’s a process you must follow in order to legally raise rents and keep vacancy rates low.
What Justifies a Rent Increase?
You have the right to set your own rental rates, but what exactly justifies a rent increase? In most cases, one of these factors is involved:
- Cost of living. Each year, the cost of living changes. Historically, it goes up every year, but there are some years where it remains the same. Over the last decade or so, the average cost of living increase per year has been somewhere around 2 percent. Thus, many landlords consistently raise rent by 1 to 3 percent per year, regardless of what happens.
- Neighborhood improvement. Clearly, rent is more expensive in desirable areas. If something positive has happened in the neighborhood where your property is located, then it would stand to reason that rental rates would increase. For example, many neighborhoods experience significant increases when a major employer decides to place a corporate office nearby.
- Property improvements. Did you recently purchase a new HVAC unit? Was the kitchen upgraded with modern appliances? Did you add on a bathroom? Property improvements almost always necessitate a rent hike in order to justify the expense.
There are plenty of other situation-specific justifications for increasing rent, but one or more of these factors is usually involved. While it’s probably a good idea to explain to tenants why you’re raising their rent, you shouldn’t feel bad if you’re doing it to keep up with the market, move up with the neighborhood, or offset property improvements.
Determining the Rent Increase
As a landlord, the biggest decision you have to make is how much you’re going to raise rent. You obviously want to increase revenue as much as possible, but you don’t want to do so at the expense of losing a tenant and leaving your property vacant.
It’s important to understand that you’re legally obligated to provide adequate notice. While the laws and fair housing regulations do differ from jurisdiction to jurisdiction, most requirements are similar across the board. Here are some general guidelines:
- You can’t increase rent in the middle of an annual lease agreement. For example, if your tenant signed an annual lease agreement 90 days ago, you can’t increase rent next month. You’ll have to wait until 12 months have passed before an increase is legally enforceable.
- If you’re in a month-to-month agreement, it’s usually okay for you to raise the rent at the end of any month. Just try not to frequently blindside tenants.
- If you’re increasing rent by a small amount (less than 10 percent), then you need to provide at least a 30-day heads up before hiking the rate up. If you’re increasing the rent by more than 10 percent, it’s usually required that you provide a 60-day advance notice.
- It’s always wise to keep rent increases as minimal as possible. However, if you must increase a substantial amount in order to justify an added expense, make sure you run careful calculations.
Not sure about how much to raise rent? Look around at similar properties, talk to other landlords in the area, and run the numbers multiple times. You’ll eventually zero in on a good number.
Notifying Tenants of the Increase
When it comes time to notify tenants of a rent increase, it’s important that you do it the right way. This means providing as much heads up as possible and clearly explaining why you’re increasing the rate.
If a tenant comes back to you and says they can’t afford the increase and will have to move out, it might be wise to consider negotiating. For example, let’s say you’re increasing the month-to-month rate from $1,500 to $1,650. If the tenant complains it’s too much, you might offer locking into a 12-month lease agreement at $1,550 per month. This makes the increase less dramatic for the tenant, but gives you the added stability of a long-term lease.
Sample Rent Increase Letter
There is no specific form or document you must use in order to inform a tenant of a rent increase, but it’s important that you get it in writing and make it as clear as possible for all parties to understand. Here’s a sample rent letter that you might send:
September 27, 2017
This letter serves notice that effective December 1, 2017, the monthly rent for the premises you now occupy as my tenant will increase by $100 per month as a result of increasing costs. This will bring the new monthly rent to $1,800 per month, payable in advance, on, or before the 1st day of each month. This is a change from the $1,700 per month that was previously agreed upon. All other terms of your tenancy will remain as presently in effect.
I appreciate your understanding in this matter and sincerely thank you for your tenancy. If you would like to discuss this matter in further detail, please don’t hesitate to contact me at your earliest convenience.
Landlord’s Signature: _______________________
Let Green Residential Help
Managing rental properties can be complicated and stressful at times. Not only does it command a lot of your time, but the expenses can quickly add up – especially as costs rise. If you need to increase rent, it’s important that you handle the matter in a manner that’s respectful, efficient, and legally enforceable.
At Green Residential, we help our clients manage every aspect of their rental properties. Whether you need help screening tenants, scheduling maintenance and repairs, collecting rent, or increasing rent, we can take care of the details so that you can focus on the big picture.
For more information on our property management services, please contact us today.