One of the most challenging decisions a landlord must face is whether to raise the rent on a good tenant. It’s a fine line a landlord must walk between increasing rent to keep up with market value and ensure a solid level of profit, while at the same time keeping a good tenant happy. The question is whether an increase in rent might upset a tenant enough for them to leave, or whether an increase could be out of their price range.
Chances are that if you have a reasonable tenant, they will understand that rent increases are inevitable over time and acceptable as well. The key is settling on a rent increase number that is palatable for your good tenant and communicating that to them in a reasonable way with enough notice so they can plan for the change.
Here are some tips on how you can raise the rent on a good tenant, and how you should go about communicating that information to them.
What does the market rent show?
Before deciding whether you are going to increase rent on a good tenant, it’s important to conduct research on what the market rent shows for the property in question. This is an analysis you should do every year on all of your properties, regardless of whether you have a good tenant or not.
One of the best tools you can use to help you with this research is HomeUnion®’s RENTestimate, which provides an estimated value of your property based on factors such as:
- Neighborhood quality
- Historical rent trends
- Details of the home, such as number of bedrooms and bathrooms
- Details of the location, including proximity to points of interest
- Market conditions, such as the local economy and quality of nearby schools
With this market rent estimate in hand, you can make a determination about whether the rent you are charging now is fair, or whether the market says it can support an increase in rent, as long as it’s reasonable compared to similar properties.
Can a landlord raise the rent every year?
What will determine when you can raise rent will depend entirely on the length of your lease contract. You will only be able to raise rent on a property once the lease contract expires. If, for example, your tenant signed a three-year contract, you will not be able to raise rent until those three years are up.
If you only have your tenants sign a one-year lease, though, you’ll be able to increase the rent every year. Whether that is a good idea is an entirely different question.
The leases you draw up and have each of your tenants sign should all lay out in clear language how rent increases may occur, including:
- How often you can reassess and raise rent
- If there is a limit to how much you can raise rent
- How you will notify the tenant of an upcoming increase in rent
Is there a limit to how much a landlord can raise your rent?
The one thing you need to investigate before you decide how much to raise rent is if the location or property of your rental has rent stabilization or rent control programs in place. Some apartment, condo and townhome complexes, for example, have rent control programs that limit how much a landlord is able to charge for rent in the first place and increase it as well. Some states also have limits on how much you can increase rent on an existing tenant.
In most states and locations, though, there is nothing that legally limits how much you are allowed to increase rent on an existing tenant.
What is a reasonable rent increase?
Determining the value of a reasonable rent increase is a nuance that is lost on a lot of landlords. That’s because oftentimes, landlords will only assess rent increases based on what the market is saying without taking into consideration the tenant’s situation. Just because the market says your property can support a 20 percent increase in rent, for example, doesn’t mean your good tenant will be able to afford such an increase.
That’s why it’s so important you take your tenant into consideration when you’re contemplating a rent increase. Typically speaking – and independent of your property – a rent increase of 3-5 percent is reasonable and acceptable. This increase would help you keep pace with inflation and rising costs you incur as the landlord. It’s a rent increase that can also easily be explained to the tenant, as we’ll discuss in a little bit.
How much notice does a landlord have to give to increase rent?
Most states have on their books laws that determine how much advance notice is required when a landlord intends to increase rent. The majority of states set this number at 30 days from the expiration of the current lease contract. In some states, such as California for instance, the notice increases to 60 days if you plan to increase rent by more than 10 percent.
Again, it’s important that you investigate and then follow your state’s rules, and it’s also a good idea that you put this language into your lease contract so your tenant knows this well in advance.
How do I write a rent increase notice?
A rent increase notice needs to be a formal letter that notifies the tenant of all the pertinent information about the rent increase, and is given to them with ample notice according to your state’s laws. The letter should be written in a formal way, on your company’s letterhead – just as your leases are.
The letter should include your company’s information, the property address, and the tenant’s name and contact information, in addition to the date of the notice. The main content of the letter should explain clearly that you are giving appropriate notice of a rent increase to the tenant, per the terms of the lease, as well as list the current rent, the new rent and the effective date of the increase. Finally, you should detail that the tenant should contact you directly regarding any questions about the increase.
There are plenty of free rent increase notice templates available on the web for you to use if this is your first time creating one.
How do I talk to my tenant about rent increase?
This is perhaps the most important aspect of increasing rent on a good tenant – establishing a clear line of communication and explaining in simple and humble terms what you are increasing the rent to and why. Legally speaking, you are only required to notify a tenant of a rent increase by a formal letter, which you could put in their mailbox, post on their door or slip under the door.
But if you are dealing with a good tenant, it’s advisable to take a more personal approach. A good tenant will appreciate a phone call telling them of the pending increase in rent before you just send them a letter.
Tricks to Raise the Rent Without Losing Any Tenants
There are a few tricks and tips landlords can use to raise rent without losing any tenants. These include:
- Communicate: We spoke about this earlier, but it’s worth repeating. Communication is key. Not only should you follow the rules about how far in advance you give notice of a rent increase, but you should take it one step further and approach your tenant on a more personal level. A simple phone call will go a long way in showing your tenants that you care.
- Explain: One trick to retaining tenants when you’re raising rent is to explain to them why you’re doing so. Explain to them that while you don’t like having to raise rent, you need to do so because your costs are rising as well. Tenants are more likely to swallow a rent increase if they understand that you’re not being greedy.
- Sympathize: One of the best ways to raise the rent without losing any tenants is to sympathize with them. By saying you understand how it could be a challenge for tenants to pay the extra rent, you’ll be breaking down the barrier that can exist between landlord and tenant.
- Compare: Finally, it’s a great idea to show your tenants how much of a value your property is even after your rent increase. No matter how good and loyal your tenant is, they are likely to look around at other properties to see if they’re getting a good deal with you once you notify them of a rent increase. So if you keep your rent at a competitive level – say $100 or so per month below market value – then you’ll be able to show them that they’re still in a favorable position, even with the rent increase.
By keeping all of this in mind and doing your research, you’ll be able to increase rent on your investment properties without the fear of losing your good tenants.