Paying and collecting rent is a necessary component of the rental property business. As a landlord, collecting rent is essential for maintaining your property and livelihood. A tough, but regular decision you must make as a landlord is whether or not to raise your tenant’s rent.
If your costs to operate your rental properties rise—whether they come from legal regulations, business overhead, or market trends—it’s time to increase your tenant’s rent.
While most tenants expect rent to increase at regular intervals, some have a hard time accepting this change. In this article, we’ll review what you should consider prior to raising your rent, legal issues to be aware of, and guidelines for how to raise your rents and keep happy tenants.
Reasons to Raise Rent
Whether you like it or not, raising rent is part of being a landlord and owning a rental property business. Increasing your tenant’s rent does not mean you are greedy. There are several pragmatic reasons why a landlord needs to raise the rents of his properties. Reasons to raise rent include:
Keeping up with the cost of living
The value of currency rarely stays the same. The same goes for tax rates. To run a profitable business, landlords need to account for annual changes from inflation, as well as state and municipal taxes.
Staying competitive in the housing market
Like the cost of living, the housing market changes with the economy. Changes in the economy will alter the renting demographic of an area. An area’s renters will determine how much a unit can rent for, as well as define what competitive features landlords should upgrade or include in their units to make their properties desirable.
Managing business overhead costs
As a successful business, you should expect for your operating costs to grow. Increased management costs could be the result of higher property insurance, administration, and maintenance costs.
We understand it may be uncomfortable or emotionally taxing to raise rent; especially if you have great, long-term tenants. However, it’s important to remember landlording is a business; at the end of the day you need to make a profit.
Increasing rent is a natural part of the business; it is possible to do without losing precious tenants or getting into heated arguments. In the following sections, we’ll show you how to increase rent smoothly by adhering to landlord-tenant laws while showing courtesy to your tenants.
Legalities of Raising Rent: What You Need to Know as a Landlord
Usually, there is no maximum amount by which a landlord can increase rent. However, there are four important legal issues you should be aware of before you inform your tenants of your decision to raise their rents. These four issues concern:
- Rent controlled areas
- Providing notice of intent to raise the rent
- Raising rent retroactively
- Raising rent to get rid of unwanted tenants
Some areas have government provisions in place that restrict a unit’s maximum rental value at a specific price. This is known as rent control. In response to growing disparities brought about by gentrification, many states and major cities are enacting rent control laws to prevent landlords from unfairly inflating rental prices.
Rent control varies widely on a state by state and city level. If your property is located in an area with rent control laws, you are legally unable to increase your tenant’s rent above the legislated amount.
There are some instances in which a property in a rent-restricted area is exempt from these laws. Because rent control laws have high variance and complexity, we recommend you review your city or state’s rent control laws from the National Multifamily Housing Council. There you will find government resources pertaining to current rent restrictions.
Providing Notice of Intent to Raise Rent
Raising rent is not an overnight process, nor is it as simple as billing your tenants a higher amount each month. As a landlord, you are legally obligated to give your tenants notice of your intent to increase their rents. A legally abiding notice to raise rents must include:
A proper amount of time
Whether or not they need time to find a new place, the current tenant must have enough time to prepare for the change in rent. Most states require at least 30 days of notice. However, the legal minimum amount of notice varies by state. Furthermore, a state may have different notice requirements depending on the amount by which rent is being raised.
The expiration of the current tenant’s lease
Unless the lease signed between you and your tenant includes a clause about changing the rent while the lease is active, you cannot increase your tenant’s rent until their current lease expires. It should be noted that this requirement is also generally valid for tenants-at-will (a tenant without a lease).
You can use this landlord-tenant laws resource from Apartments.com to review how much time you must legally give your tenants prior to the end of their lease (along with many other landlord-tenant legal rules).
Raising Rent Retroactively
If you bill your tenants with an increased rent and fail to provide proper notice and/or fail to wait until the end of their lease, you can expect to face the legal consequences of raising rent retroactively. In this case, your tenant may file a suit against you in court.
To avoid this mistake, we recommend the following steps:
- Give your tenants at least 60 days of notice. If your tenant needs to find a new place to live, this will give your tenant ample time to prepare for your impending change. Plus, if you know your tenant is going to leave at the end of their lease, you have more time to make the necessary preparations towards advertising your unit and interviewing new tenants, therefore reducing your unit vacancy times.
- Provide your tenants with a verbal and written notice. You should first send a written notice via the USPS’s certified mail service. With certified mail, you will receive proof that your notice was mailed and delivered. Just be sure that you send your notice out with enough time for it to be delivered within the required legal time of notice.
If you’re unsure how to write a notice of increased rent, check out the recommended elements from Apartment.com under the section “What to Include in Your Rent Increase Letter.” You can write one using an online template.
With both methods of notice, be sure to document the new rent price, as well as the date in which the new cost will go into effect.
Most tenants will view your extended notices and verbal conversations as kind and considerate gestures. Simple gestures like these will help maintain long-lasting relationships with your tenants, as well as a respectable reputation for your business.
Raising Rent to Get Rid of Unwanted Tenants
Eviction is never easy, but increasing your rents should never be a means to remove unwanted tenants from your property. If you have an aggravated relationship with a tenant and they suspect you are increasing rent to encourage them to move out, they may take you to court for landlord-tenant punishment or retaliation. Raising rent to punish a tenant is a costly lawsuit, not to mention an illegal act.
Now that you’re aware of the common legal pitfalls of raising rent, we’ll show you how to raise rent painlessly so you can keep your business and tenants in good standing.
How to Increase Your Tenant’s Rent
So you’re convinced it’s time to raise your rent. You know which legal mistakes to avoid, and you have some ideas on how to considerately inform your tenants. To have the smoothest transition possible, follow these guidelines:
- Determine the price you will add to your tenant’s rent. You want your units to price competitively in your market. Before you raise your rent, research vacant units in your area to see what prices they rent for. You can use search tools like Rentometer, RENTCafe, Zillow, or Apartments.com to assess market and competitor trends.
- Raise your security deposit. A raise in rent usually means increasing the security deposit. As a rule of thumb, security deposits account for one or two months of rent. Remember the handling and cap amount of security deposits are state and city-regulated, so be sure to check your local laws before finalizing your security deposit amount.
While raising your security deposit is optional, it is a prudent step to take that will protect you against missed payments.
Add a rent increase clause to your new leases
To avoid surprise on your tenants’ behalf, add a clause in your lease about expecting a small rental increase at the end of the lease term. This way, you can ensure your tenants are informed about rental increases prior to signing their contracts.
Send a rent raise letter, with or without options
Follow a template if you have to. In this letter, you can answer any questions you anticipate from your tenants. You can quell your tenants’ concerns about the rent raise by explaining the necessities or benefits of the increases. For example, you can explain their increased payments will go towards your increased tax or insurance payments and/or improvements to the property.
A rent raise letter without options will state the new rental price of the unit at the end of the lease term. If you send a rent raise letter with options, you give your tenants the option to sign leases with different term lengths and rental rates. You can use a rent raise letter with options to your advantage by providing your tenants with the option to sign longer leases for smaller rental increases.
Take a look at the structure of these rent increase letters from the BiggerPockets blog to get an idea on how to compose a notice letter with or without options.
Inform your tenants with a phone call
We recommend you have a brief phone call with your current tenants and let them know of the upcoming changes to their unit’s price for their next lease. A phone call can provide you with an opportunity to let your tenant feel heard and cared for by allowing them to voice their concerns. Be courteous while listening to your tenant, and be firm and assuring in your reasonings for the increase.
Remember to document when you called your tenants and what you talked about. While you will already have documentation showing your written notice of intent to raise rents, it will never hurt you as a business owner to have a body of evidence showing you performed your due diligence.
Tips to Raise Rent Smoothly
Here are a couple of tips that will help your tenants accept your rent raise painlessly.
Build good rapport with your tenants
Having a good relationship with your tenants will make raising rent easier for everyone. Maintaining a professional, but amicable relationship with your tenants is easy and takes little effort.
Small details like remembering their names, hobbies, or occupations can go a long way if you engage in regular conversations with them. Engaging in short, friendly interactions—whether through conversation or greeting cards are simple ways to show your tenants you are personable and caring.
Another clever strategy for building rapport with your tenants is by encouraging their interest in your property. This could come from simple acts like sending out polls for improvements or upgrades to the property, or preparing small communal events.
- Do not ask tenants what they think is a fair price. This should be a no-brainer, but it is an easy trap to fall into if you become too emotionally concerned about upsetting your tenants. If you ask your tenants for their input rental prices, chances are you will receive estimates that would prove unprofitable for your business.
No one wins in this situation. If you reveal to your tenants your plans to increase rent by asking them for their input, you will either upset them by choosing a price that suits your business, or you will sabotage your business by choosing a price that appeases them.
How Often to Raise Rent
Ultimately, your decision to increase rent is up to you. How often you raise rent, and by what amount, will also depend on the type of rental property you own, the number of units, and the type of tenants you have.
Most landlords increase their rents every year to stay up to date with market trends. However, some landlords with great long term tenants raise rents every few years, and instead raise rents on a per unit basis, like when a short-term renter moves out.
The problem with the latter scenario is that it creates space for a large disparity in a unit’s rental value versus its market value. If a landlord chooses to keep rents low in a growing market, he could suddenly face a steep incline in business costs. He would be forced to make a huge increase in rent to rebalance business expenses. This rental increase strategy is short-sighted, as it often severs any goodwill in a landlord-tenant relationship.
As a rule of thumb, we suggest you raise rent in small increments each year to keep up with your market and business costs. The standard amount is between two to four percent of each unit’s rental cost. Your tenants will be able to handle small annual increases in rent much easier than a large spike in cost once every few years.
When the Time Comes to Increase Your Tenant’s Rent
Raising your tenant’s rent does not have to be a daunting or drawn out process. All you really need is to be aware of your local rent and lease laws to make your new rents go into effect. Just remember, the most essential component of raising your rent is keeping your tenants happy. If you treat them with kindness and consideration, give them plenty of notice, and address their concerns, you will maintain a profitable business with long-term clients.