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How Much Should I Raise Rent?

How Much Should I Raise Rent? How Much Should I Raise Rent?

Summary

If you find your property at break even, you may be overdue for a rent increase. Understanding what’s going on in the local rental market is the key to knowing if you can raise rents and by how much.

There is a fine line between having your property expenses covered each month and being in the hole—from costs associated with maintenance, vacancies, and capital expenditures. Your challenge as a landlord is to rent your property for long-term profitability and still responsibly handle tenant requests and various maintenance and repair needs.

If you find your property hovering at a bare breakeven point for more months than not, you may be overdue for a rent increase on the property. A solid understanding of what’s going on in your local rental market is the key to knowing if you can raise rents and how much you can raise them.

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The question about whether – and how much – to raise rent naturally arises when a tenant moves out. At that point, you may be facing the need to pay for major repair or upgrade deferred until the property is vacant and want to be sure you can recover those costs within a reasonable timeframe. Other factors that can trigger a rent increase include:

  • Higher utility costs
  • Housing Market rates 
  • Higher property maintenance expenses 
  • Property tax increases 
  • Higher insurance premiums 
  • Increased HOA or condo fees

These are just some of the most common situations to justify a rent increase; as a landlord, you can raise the rent at any lease renewal as long as you comply with local and state laws.

When can a landlord raise rent? 

A landlord can raise rent before the renewal of a lease. Your signed lease renewal will lock in the tenant’s payment terms and upkeep obligations over the next term of the lease, and you can’t make any changes unless the lease is broken. If you’re considering this option, check your local landlord/tenant laws to ensure you provide the required advance notice to your tenant. 

According to local and state laws, you can only raise the rent once a year if you have tenants who receive housing assistance or Section 8 vouchers. Section 8 tenants have a cap on the amount of rent they can pay, so check with your real estate attorney or the local housing office to help you to determine if you can raise the rent and, if so, by how much. 

When a landlord cannot raise rent

There are certain times when a landlord cannot raise the rent. You can not raise the rent if: 

  • local laws specify set rent amounts, and your increase would exceed the threshold
  • if the current lease term has not expired
  • you have not provided proper notice for a rent increase
  • your lease stipulates that there will not be a rent increase
  • you’re trying to force a tenant to move out, other than no renewing when the lease term has expired
  • you have a rent-controlled property, or if the tenant is on housing assistance
  • your rent increase could be seen as an attack on the tenant
  • your rent increase could be construed as discriminatory according to the Fair Housing Act.

If you have determined that your rights as a landlord allow you to raise rents, you now need to figure out how much you should raise them. 

How to determine if you should raise rents?

Many factors determine the cost of a rent increase over a year. These include utility rates, maintenance costs, insurance, taxes, and other expenses. In most cases, a small yearly rental increase (between 3-5%) will allow you to keep up with the market and help insulate you in the case of large capital expenditures. 

If you haven’t implemented yearly rental increases before now, it’s time to raise rents. Professional property managers suggest keeping the per-year increase to 5% or less to prevent your tenants from moving – a higher increase could send a negative signal and price a good existing tenant out of your property. 

Research your specific local and state laws for guidance, and be sure you understand how your property’s location is changing each year – are property values increasing? What about the demand for rental units?  With a rent estimate report from RentSpree, you'll quickly get a rental comparison report and rent rate estimates to help you maximize your rental profit. Your comparison report will identify similar properties in your neighborhood and allow you to readily compare published rents to see if you should raise the rent. 

The Rent Estimate Report gives you: 

  • a detailed snapshot of the local rental market, with vacancy rate estimates and rental saturation benchmarks for the area.
  • access to a map and list of local rentals and property details, plus rental rates to help you better understand the surrounding area.

Why increasing rents yearly might be necessary

Estimating an appropriate rent increase can be tricky. If you raise rents by $10-$15 per month yearly, you train your tenants to expect a similarly small amount the following year and improve their likelihood of staying in the property. A larger increase can come as a shock and could cause them to look around at what else is available and possibly choose to move. Still, with your comparables in hand, you’ll be able to confidently set competitive rents with similar properties in your neighborhood –and know you’re offering a fair price.

A Rent Estimate Report is an essential tool to gain a clear picture of the potential profitability of a rental property. The report can help you create positive cash flow from the outset and ensure an acceptable return on investment.

With the report, you can examine rental rates in the area each year to raise rents to keep you in line with the market and ensure you can build your fund to improve or renovate the property when the tenant moves out. The right renovations should allow you to set your rent at a higher level. 

How do you communicate a rent increase to your tenants? 

1) Call to build rapport

Keep communication friendly and helpful. Establish regular communication if you haven’t raised rents before or have even spoken to your tenants since they moved in. Contact them a few times by phone to check in and build rapport – let them know you’re keeping an eye on the property to make sure it meets their expectations, and be sure they know you’ll be responsive when they need to contact you about any problems. If you have open communication channels from the beginning, it won’t be so awkward to notify them about a rent increase later. 

2) Call them about the rent increase - then follow up with the written notice

Your tenants need time to determine their plans and respond to your rent increase notice. Most local rental laws state you need to send a written notice 30-60 days before the rent increase. Some states require a longer notice period. If the lease ends on August 30, and both the lease and local regulations require you to give at least a 30-day for any changes to the leasing agreement, you must notify the rent increase by July 31. It’s always wise to provide such notice with time to spare.

It’s common courtesy to call your tenants first to tell them that the market rents have increased or your costs have increased, which means you plan to increase their rent accordingly when their lease renews. After your call, send them a rent increase letter that outlines what you said on the phone, how much the increase would be, and the date the new rental rate will become effective. Send this letter by certified mail to verify your tenants received it.

3) Consider negotiating a minor rental rate increase if the tenant is willing to sign for a longer-term lease

Your tenant shouldn’t feel like they need to “pay more” or “leave.” Another option is to offer them a multi-year lease with only a slight yearly rent raise. 

As you well know, it’s expensive to turn over a property. If you have a good tenant with whom you can negotiate a longer-term in exchange for a smaller rent increase, you improve the chance they will stay in place and save you turnover costs. Your effective return on the property will be greater with few turnovers, even if the rent is slightly lower than the market.

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