How and Why to Raise Rents

If you are a landlord and you’ve been worried about how to raise the rent on a tenant, read on to see whether you should and how you can manage the process.

Research Your Rental Market

Before you start raising rent, you’ll want to do some market research and find out the going rate for rent in your neighborhood. Raising the rent too high will most certainly generate tenant complaints and could mean you lose a good tenant who leaves to find something more affordable.

Check the market rate for rent in the area of your property by talking to property managers, asking real estate agents, and looking at rental advertisements and use sites like rentometer.com and rentrange.com and search rental prices for your property. 

Maintain Positive Cash Flow

To ensure that being a landlord is profitable for you, you’ll need to keep up with expenses and maintain a positive cash flow. Raising the rent and reducing expenses are ways to increase cash flow.  Consider your expenses and costs in the following areas below.  Factor these expenses into rent cost during lease renewals to make sure you’re maintaining a positive cash flow. 

• property taxes
• higher utility costs
• HOA dues
• insurance premiums
• property manager
• cost-of-living expenses
• maintenance
• turnover costs
• vacancy

Rent prices have increased an average 9% per year since 1980, outpacing wage inflation by a significant margin in most years.   As of the writing of this article the landlords have the ability to raise rents as competition for rental housing grows. However, markets vary dramatically, even within the same metropolis, so you’ll want to be aware of neighborhood rental rates when considering an increase. A rent increase that is too high could result in a tenant turnover which could be more costly in the long run.

Rule of Thumb

The goal of any landlord is to stay competitive with market rents, with as little tenant turnover as possible. Thus, a good rule of thumb is a three to five percent increase each year, depending on the state of the market.  Consistency is the key….it is best to do small increases each year than one large one in 3-5 years.

If you do decide to increase rent prices, here are a few things to consider when deciding how much:

1. Look at local housing laws. Make sure that your rent increase complies with local limits and rent control laws.
2. Rental Compatibles.  If rentals like your own are increasing in price, this is a good indicator that you can increase your cost as well.
3. Your cash flow.  The rent you charge should be based mostly on the market rate, but you must make sure you have enough cash flow to make a profit while still being competitive with market rates.  If no cash flow, then sell the property. 

When should you increase the rent?

In most cases, state law or your lease agreement will dictate both when and how to communicate a rent increase. Check with your state laws and your lease agreement to determine the amount of notice you need to give. In many jurisdictions, 30 days’ notice is the minimum requirement.

Reach out to your tenant 60 days before the lease is up to let them know there will be a rent increase if the lease is renewed. This gives your tenant the opportunity to adjust their budget and prepare for any increase.  Sending the letter 60 days in advance also gets tenants thinking about their plans early. You can also use this opportunity to give them an incentive to renew their lease early. For instance, offering your tenant a 3% increase if they renew 30 days before their lease ends, and letting them know that it will jump to a 5% increase if they wait until the last minute to renew.  Not only will they be more motivated to renew early, but they’ll be less likely to complain about the increase if they feel they are getting a chance to save money on rent by confirming their plans early.

If they don’t plan to stay, a 60-day advance letter still makes it more likely that the tenant will let you know if they’re moving so you can start looking for new tenants.