Anyone who has invested in real estate knows that it is a very dynamic market. With ever-changing real estate market trends, landlords need to be constantly vigilant about their bottom line; what may have been profitable last year might not be profitable this year. Oftentimes, landlords need to instate a rent increase in order to continue making money with rental properties and to avoid financial hiccups.
Use this guide to figure out how much to increase rental rates, how often, and how to cushion the blow to tenants.
How Much Should Rent Increase?
The amount depends very heavily on your local market. Savvy landlords need to be constantly aware of their local housing market and the real estate market trends within it.
Many landlords increase rent based on the Consumer Price Index. This measure effectively calculates the increase in prices across the economy and typically falls within 3 and 5 percent. Inflation is a reality of life, and real estate follows a very similar trend to the rest of the economy.
However, increasing rental rates arbitrarily based on these numbers can sometimes have adverse effects. A better strategy would be to study your local housing market and evaluate the performance of rental properties in your area. Rental comps should be carefully studied when determining your rent increase. If you raise your rent while your neighboring landlords don’t, you run the risk of alienating your tenants and overpricing your property. On the other hand, if the overall rent in your area is increasing faster than yours, you’d effectively be losing out on potentially significant income from your rental property.
Studying your rental comps is, therefore, a crucial first step. Thankfully, there are fantastic resources available to you for this type of market research, which make being a landlord much easier. Using a premium service (like Mashvisor) to research your rental comps will guarantee your rent is set at the perfect price.
Another justified reason for a rent increase is if you’ve conducted work to improve the value of your property. Things like new heating systems, insulation, and other renovations can factor into the amount of a rent increase.
Should I Increase Rent in the First Place?
A rent increase can sometimes be a very tricky thing. Some landlords prefer to keep consistent prices in order to maintain the goodwill of their tenants. Rent increases which are too frequent or too large can have a very unfavorable impact on your vacancy rate. Conversely, maintaining a stagnant rental rate means that you’ll be missing out on a substantial amount of rental income. There is a delicate balance to be struck when determining whether to increase rent and by how much. When a rent increase comes with a very high risk of a higher vacancy rate, you might want to reevaluate your decision.
Related: When Is the Time for a Rent Increase?
What Legal Requirements Do I Need to Know About?
Many states and municipalities have strict laws regarding when and how a rent increase can occur. Before making any decisions, be sure you’re fully informed of your local rent increase laws to avoid making an illegal rent increase.
Some locations, such as Washington DC, have rent control laws, which means there are heavy restrictions on your ability to instate a rent increase. Similarly, rent stabilization on some properties means there are limits as to how much rent can be increased annually on said properties.
In all states, landlords are forbidden from raising the rent before a tenant’s lease agreement expiries. Thus, if your tenants’ lease agreement is set to expire soon, use this opportunity to make the necessary increase in rent before locking into a new lease.
In the majority of states, and in the circumstance that a lease agreement does not exist, landlords are required to inform their tenants of a rent increase at least thirty days before it is enacted. Others have more strict laws, requiring 60 or more days.
Related: Rent Control and How It Affects Your Real Estate Investment
How Should I Inform My Tenants?
It’s always important to remain empathetic of your tenants. On the one hand, you’re running a business and you need to continually ensure that your rental property is generating profit. Simultaneously, you need to understand that no one is going to be happy about paying more every month.
In order to make sure that it all goes smoothly, there’s a handful of considerations you need to keep in mind. First off, the longer a notice period you can provide, the better. This will allow your tenants to prepare themselves financially for whatever the rent increase is going to be. Simultaneously, this will allow your tenants plenty of time to find a new place to live in if the rent increase puts the price of the residential property beyond their reach.
There are also many considerations to take when crafting your rent increase letter. Rather than simply stating the changes in rent, it is advisable that you justify the rent increase in your letter. This can include, for example, mounting insurance costs, maintenance on the building, and general additions in value. This will help your tenants feel that the increase is justified, and therefore keep their goodwill. A well-crafted rent increase notice can go a long way towards tenant retention.
In the circumstance that your tenants can’t afford the higher rent, consider negotiating to reach an agreement that suits both of you. For example, you might consider conceding to a slightly lower rent increase if your tenants agree to a long-term rental lease. This more secure income can be a positive tradeoff for a lot of landlords since this route involves a lot less risk.
Related: Raising Rent Without Losing Tenants: 6 Tips for New Landlords
Bottom Line
How much can a landlord increase rent? If you want good tenant retention, the answer is: a reasonable amount based on market indicators.
It’s a delicate process that needs a lot of preparation and insight. As such, it can be tricky for a first time landlord and even a seasoned professional. Owning a rental property should always be thought of as a business, and you should always aim to increase rental income. But by paying close attention to your rental comps and the behavior of the real estate market overall, you can guarantee that your rent increase is financially sound.
Most importantly, always keep your tenants in mind. Don’t be the grumpy landlord who hikes up rent for no good reason — be the understanding, yet savvy, landlord who’s looking out for the best interest of their tenants, while also guaranteeing a good profit from the real estate property.