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Whether you are a property manager or a rental property owner, the profitability of the portfolio under your care depends on finding the optimal rental rate for each individual property and the market at large. As your current rental properties near the end of their lease terms, you will need to reach out to your tenants to determine whether they are ready to renew their current lease or will be moving to a new home. In each case, you will need to decide whether to keep rental rates at their current levels or adjust them for the new lease term.
An accurate analysis of the local rental market and of your property’s performance is necessary in order to develop a meaningful rent estimate and determine whether it is time to increase rent, decrease rent, or hold rental rates at the current level. Should you decide to increase your rental rates, you will need to send a rent increase notice and put into place a system for receiving responses from tenants at the end of their lease term.
When is it time for a rent increase?
Developing a rent estimate is a function of determining how your rental property fits into the current market and whether its performance is in line with that of comparable properties in your area. You’ll also want to balance the potential revenue of a rent increase with the impact it will have on your current renters.
There are a number of different scenarios that might lead you to increase the rental rate on your property:
Over time, the cost of goods and services goes up and the cost of housing rises in response. Over the long term, rental rates will rise in response to a variety of long-term economic trends and the costs associated with maintaining and operating the property.
If you have made upgrades to the property, whether in the individual unit or in community amenities or systems, you will need to pass that cost on to your renters in the form of higher rental rates. In addition, property upgrades that make the rental property more desirable or move it into another category -- for example, from mid-market to luxury property -- will come with a commensurate increase in the potential rental rate.
Increased demand in a market almost inevitably leads to a rise in rental rates. This demand can come from a larger number of factors, including:
- Conversion of existing rental properties to condo or co-op ownership
- Long-term decline in the condition of comparable local properties
- Short-term destruction of comparable local properties through natural disaster
- New employment opportunities leading to an influx of new residents
- Economic factors, including a decrease in home ownership
- Market factors including low inventory or a tightening mortgage market
- Improvements or changes that move a commonplace property into a specialty category or niche
- Increased demand as a result of increased or more effective marketing
When is it time for a rent decrease?
Unfortunately, you won’t always be in the position to ask for an increase in rental rates. Sometimes, it will be in your best interest to decrease your rent estimate, so that you can decrease vacancy rates and days on market. It might be time for a rent decrease in the following cases:
If a market has more rental properties available than tenants to fill them, it is said to have reached saturation. If your market becomes saturated, either through population or demographic shifts or through the addition of new properties to the market, it may be necessary to decrease rental rates either temporarily, through a limited-time promotional offer, or long-term.
Declining property values
If property values in your area have decreased overall, you may have to decrease rental rates in order to stay competitive in your local market. A property value decrease may be the result of declining conditions in an older property or an overall market downturn due to job or industry loss. In addition, property values may decline in the event of an overall economic downturn or the bursting of a temporary real estate value bubble.
When should you keep the rent the same?
Sometimes, the numbers don’t support any change in your current rent estimate. You may want to keep the rent the same under the following conditions:
Rent increases generally bring with them increased vacancies, at least temporarily, as tenants leave to find more affordable rental rates. If you have a great tenant in place -- one who pays on time and is generally reliable -- you may find that it is worthwhile to keep the rent the same during a new lease term. This may help you keep that tenant in place, saving you costs associated with turning over the property for a new tenant, such as repairs, improvements, marketing and onboarding costs.
In the event of an economic downturn affecting your local market, you may want to keep rents stable for a year or more. This can help you retain current tenants and avoid trying to fill vacancies during a time when people may be out of work or struggling financially, making it harder for you to qualify them for a new lease.
You may be able to increase profitability even while keeping rental rates stable. For example, if you currently include utilities in the rental rate, you may want to pass some or all of these costs along to your tenants. A tenant request for a pet waiver may allow you to implement a monthly pet rental fee. If you are currently paying for lawn maintenance, it may be time to pass that responsibility on to the tenant.
Determining whether a property is eligible for a rent increase
It is important for you to check with your attorney regarding local and state limits on potential rent increase. You may be limited in the ability to increase the rent as well as the amount of the potential increase. This limitation could be a product of rental stabilization efforts in your area. In addition, if your property is a qualified Section 8 property, there is an approval process in place before you can increase the rent.
You may be limited in the amount of rent increase you can impose if the tenant has a disability or if the increase could be construed as discriminatory under the provisions of the Fair Housing Act. You cannot use a rent increase to punish a tenant or to try to force him or her to move out of the property.
You cannot impose a rent increase during the terms of a lease agreement. In addition, you must give proper advance notice to tenants before instituting a rent increase.
What should be included in a rent increase notice?
A rent increase notice should include all of the following information:
- Name of all tenants in property
- Property address
- Landlord or property manager’s name and contact information
- Date written
- Current rental amount
- Amount of the rent increase
- Date the rent increase will go into effect
- Reference to pertinent section of the lease agreement
- Amount of time needed for non-renewal notification
- Reference to pertinent section of the lease agreement
In addition, some states and local municipalities have specific guidelines covering the timing and content of rent increase notification. Be sure and check with your attorney to determine if there are special circumstances in your area that you should keep in mind.
In addition, discuss with your attorney the notification and response processes that are preferable according to the laws and customs of your local market and applicable local and state law. He or she will also advise you as to how long you should retain digital copies of both your notifications and tenant responses and how they may be securely stored in compliance with relevant privacy laws.
It is important to ensure that you can prove that you have delivered your rent increase notice. You may want to use registered mail in order to track the delivery of your letter. You may also want to follow up with an email to provide a second layer of notification and response. In order to encourage your tenant to respond in writing, you may want to include a self-addressed, stamped envelope along with a response letter for them to fill out and sign. Similarly, you can include a fillable form or sample response language in your email notification.
If you use an online transaction management platform, you may want to send the tenant an electronic notification along with a response form that they can complete and submit with their digital signature. If you are concerned about retaining tenants after serving a rent increase notice, you may want to include additional information on local market conditions to justify your rent increase. The earlier and more consistent your communication, the better chance you have of keeping your best tenants in place. Welcome questions and responses from tenants following the rent increase notification so that you can keep the lines of communication open.
As you create a rent estimate to evaluate your property’s potential value and consider whether it’s time to increase your rental rate, you’ll benefit from data and analysis designed to help you better understand your market and comparable properties in your area. RentSpree’s rent estimate report is a comprehensive tool designed to give you the information you need so that you can keep building value.
Continue to Chapter 6: How to Price Rental Homes Appropriately or jump to a different article.