One of the most challenging, mathematical and tactical things a property owner will have to face is how, when and how much to raise the rent on existing tenants. There is always the fear that raising the rent might force your tenant to seek housing elsewhere, and one of the most expensive things for landlords is tenant turnover.
At the same time, raising the rent allows a property owner to keep up with the pace of inflation, with rising costs they incur and to make an ever-increasing return on their investment. The key, of course, is doing your research on the market first, understanding what the law says you can and cannot do, and then communicating the message to your tenant in a way that convinces them to stay.
Reasons to Increase a Tenant’s Rent
There are many reasons why you as the property owner would want to increase the rent on your tenants. The most obvious reason is that as time passes, your costs of being a property owner increase. For example, property taxes might increase every year. Even if that increase is only 3 percent, for instance, if you do not increase your rent by at least that much, you’ll be taking a pay decrease.
You may also be incurring increased costs in the form of higher HOA fees, utilities, insurance and maintenance fees. In addition, you may have had to make a big repair at your property or the home was due for a big-ticket item replacement, such as the furnace or the roof.
Increased costs aren’t the only reasons you would want to raise a tenant’s rent, though. If the market you are invested in experienced a boom recently, you may want to take advantage of upping your rent to be more in line with properties that are similar to yours.
Sample Rent Increase Letter
By searching the web, you can easily access a free rent increase letter. Some of them are more formal than others, but they all include the same basic information. On it, you will want to include your tenant’s name and property address, the date of the notice as well as your name (or company name), address and contact information.
You will then want to notify the resident what the rent will be increasing from and to, and what the effective date of that increase will be. You will then want to sign and date the notice at the bottom.
Know the Law
Just because you have incurred extra costs or the market has improved in your region doesn’t mean you can necessarily raise the rent, though. Each state has its own rental laws, and if you’re in a region or state with rent control, or if you rent Section 8 housing, then how much you can raise the rent may be regulated.
As of the end of 2018, four states plus the District of Columbia had some form of rent control, nine states allow the localities to decide for themselves, and 37 states either prohibit or preempt rent control. Knowing what the rules and regulations of your state are, and then following them, is essential in order to avoid fees and fines.
Know Tenants Rights
Similarly, you will want to know what the rights of tenants are in your state and region. This includes not only details about how much and when you can raise rents, but also how long in advance you need to notify tenants of an increase in rent, and how long they have to make a decision. By being educated about the laws that govern both ends of the relationship, you’ll ensure you don’t violate any rules and keep your tenants happy in the process.
Know the Market Rates
Once you’ve confirmed what you are and are not allowed to do by law, the next step is to research what the market rate for a property similar to yours is. By making this determination, you will be able to compare your current asking rent to similar properties in your market to see whether you are below market value and by how much.
One of the best tools to use to do this research is HomeUnion®’s rent estimate tool, which allows you to see your true earning potential of your property based on its address. The RENTestimate tool provides rent, price and expense automated valuation models to predict all the values of your property.
While the RENTestimate doesn’t provide an official appraisal of a property, it does serve as the perfect starting point for residential property valuations, and allows you to see side-by-side what other properties like yours are charging for rent.
Increase Rates Incrementally Each Period
Once you have determined the fair market value of your property using the RENTestimator, you can see how far below market value your property is, and how much you can increase rent while still giving yourself a competitive advantage. To that end, you may want to consider remaining $50 to $100 below market value when it comes to monthly rent so that your property stands out from your competition.
If through your research you find that your property is $250 below market value, for instance, you may see the opportunity to increase your rent by $150 and still remain below that $100 competitive threshold. What you shouldn’t rush to do, though, is increase the rent by that much in one fell swoop. Doing so will often scare and anger tenants, and may make your property unaffordable to them, resulting in your property becoming vacant.
Instead, it’s a good idea to raise rent incrementally over a period of time until you reach that optimal value. In this example, you might want to increase rent $75 per month each year over the next two years to close that gap. That’ll give your existing tenant time to adjust and will make them more amenable to staying.
It’s also a good idea that you raise your rent each year no matter what, if only by a small amount, just so that your tenant comes to expect it to happen. This will help “train” the tenant into being agreeable to rent increases each year.
Don’t Raise Beyond 8%
No matter how far short of market value you are, the key number to stay below is 8 percent. You never want to increase your rent by more than 8 percent in any given year. This guideline will help keep you in check and won’t significantly impact your existing tenant in the process.
What this means is that if your current rent is $1,000 per month, for example, you don’t want to raise your rent by more than $80. This may throw a slight wrench into your plan to incrementally raise rent to a target amount, forcing you to extend the period over which you stretch the rent increases. But doing so this way will give you a better chance of keeping your existing tenant and not experiencing a vacancy at your property.
Whether it’s warranted or not, tenants will often expect to get something in return for the increase in rent they will be paying. The best way to approach this is to be understanding, as you probably would expect the same thing from your landlord if the roles were reversed.
One of the biggest keys to keeping tenants happy (and one of the most overlooked aspects of being a property owner) is establishing a good relationship with your tenant. The tenant-landlord relationship doesn’t have to be informal. By being friendly and establishing a good working relationship with your tenant, they are likely to be more amenable to thing such as increases in rent, for instance.
Once you’ve established this relationship, one of the best ways you can ease the pain of a rent increase is to ask the tenant for their input on property upgrades. Maybe when you present your tenant with a rent increase letter, you can tell them that you’re considering making upgrades to the property and you’d like their input as to what they’d prefer.
Once you’ve asked for their input, you should seriously consider making one or more of those upgrades to the property, if it makes sense for you. This will not only keep your tenant happy and show them they are getting something in return for the increase in rent, but it will also improve your property’s value as well.
Handle Backlash (if it comes)
Despite your best efforts to establish a good tenant relationship, keep rent increases in check, provide ample notice and consider property upgrades, there are times when you still may need to handle the backlash from your tenant when you are raising the rent.
If and when this happens, how you approached the relationship before it, and how you respond to the backlash, will go a long way in determining the tenant’s response. First, you should seriously consider first delivering the news of the impending rent increase by phone and then following that up with the official letter. This will allow you the opportunity to answer any questions and head any backlash off at the pass.
Second, make sure you sympathize with the tenant’s points and situation. An increase in cost to them will certainly have an impact on their life, even if you think the increase might be minor. Tell them you understand how they feel, and explain to them some of the reasons why you are increasing the rent. If you abided by the suggestion to remain below fair market value, then you can even tell them they are still getting a good deal compared to other properties like yours on the market.
Finally, you could even consider waiving the increase in rent if the tenant is willing to sign a long-term lease. This would keep their cost the same while also providing you with the long-term stability of having a consistent tenant.
By following all of these tips and suggestions, you’ll have a better chance of raising the rent to make more money while not losing your existing tenants.