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How to Balance Rent Increases for Profit with Tenant Satisfaction

rent increase guide for landlords

Rent increases are a sometimes confusing and controversial subject. However, increasing the rent is something every landlord will have to deal with sooner or later. Understanding how to handle rent increases, the amount to ask for, and when to raise rates is key to your success as a landlord. Follow along with us below as we walk you through how to balance raising rates with tenant satisfaction and retention.

Common Reasons Why Landlords Raise the Rent

Landlords increase rent for a variety of reasons, and it becomes a critical factor in maintaining profitability. As expenses begin to rise, property owners find themselves needing to offset those factors to keep healthy cash flow. Generally speaking, landlords can legally increase the rental rate as one lease comes to an end, and another begins. However, if the lease agreement is month-to-month, rent increases, landlords may request an increase at any time with proper notice. Common reasons to increase rent include, but are not limited to, the following:

  • Offset Maintenance Costs
  • Help Pay for Improvements or Renovations
  • Mitigate Increases in Taxes
  • More Closely Match Market Rent in the Area
  • Increase Profit Margins
  • Increased Insurance Premiums
  • Rising HOA Dues

How Much of a Rent Increase Should You Ask For?

Individual markets vary, but across the board, a 3% to 5% increase per year is a widely accepted number. That said, the local neighborhood will drastically affect your ability to request increases. Keep in mind; the goal is to be in line with the competition while avoiding tenant turnover or vacancy. If your requested rate is too high, a tenant might seek other housing options, leaving you with the much more costly process of securing a new occupant. As you weigh your options, here are some factors to consider when determining the rental rate increases.

how much should you raise the rent

What to Consider When Deciding Rent Increase Amount

  1. Local Housing Laws – Requested increases must comply with any applicable state or local laws. Do your research ahead of time and make sure you meet the requirements or limitations your jurisdiction sets forth.
  2. The Competition – Take a look at what is for rent around you with similar specifications and amenities. If the rental rates are increasing throughout the area, an increase in your property is likely a safe bet. Thanks to the Rentometer price comparison tool, landlords can easily compare properties in their local area.
  3. Profitability – Profit in rental properties is a balancing act. Ideally, you will make enough in rent to cover any expenses and then some. However, market rates play the most prominent role in how much you can and should charge. Therefore, make sure you can create enough cash flow to turn a profit while at the same time staying competitive against similar properties in the area.

How to Notify Tenants of a Rental Increase

Many states and local jurisdictions require that landlords notify their tenants in writing when they intend to increase rent. That said, the prior notice required depends on how much of an increase you are asking for. When proposing an increase under 10%, a typical notice of 30 days is good practice. Every state may have different requirements, so check local landlord-tenant law to ensure you comply. Below we list a few state and local requirements landlords should be aware of:

Laws to Look for When Raising Rent

  • Rent-controlled Housing Regulations
  • Limits on Maximum Increase Amounts
  • Amount of Notice Requirements
  • Restrictions on Frequency of Increases

The best way to approach notifying tenants is by using professional and clear communication. A well-written notice can go a long way in reducing conflict or push back from tenants. This is also an excellent opportunity to reiterate any payment or late fee policies in place through your rental agreement. When drafting your rent increase notice, be sure it contains all of the pertinent information below:

notice of rent increase

What to Include in a Rent Increase Notice?

  • Opening using the tenant’s name for a personal approach
  • Property’s full address
  • Date the notice is written
  • Short message thanking them for their tenancy
  • Current rental rate
  • The amount of the increase
  • Effective date of the increase
  • Landlord contact information
  • Requirements for responding to the notice – either agreeing to terms or giving the notice to vacate
  • A friendly closing sign off

Another optional but worthwhile item to include is a brief explanation for why the increase is needed. Not every landlord will do this but providing the reasoning to your tenants serves a few purposes. Citing reasons such as higher tax rates gives tenants a chance to understand circumstances that are not within your control. Highlighting things such as new improvements that tenants have the benefit of enjoying drives home the value they are getting. Either way, a concise explanation shows tenants where you are coming from as an owner and helps them better understand the need for an increase.

Landlord Best Practices for Raising the Rent

There are a few steps landlords can take to avoid disputes come lease renewal time. Although many tenants accept rent increases as commonplace, that does not mean they will be happy about it. Landlords may face even more significant pushback if they choose to raise the rent by a considerable amount above the standard 3%. Therefore, there is another option to consider built-in rent increases. Instead of springing increases on your tenant as they come up for renewal, build them into the existing lease agreement.

Benefits of Built-in Rent Increases

  • Terms include predetermined increases in the original lease, eliminating chances for dispute
  • Added transparency mitigates the negative financial impact on tenants
  • Ensures an increase in rental income for the landlord
  • Owners can anticipate rising costs and plan accordingly

Disadvantages of Built-in Rent Increases

  • Locks landlord into a set amount
  • Not easily renegotiated if the landlord seeks a more considerable amount to cover unforeseen expenses

Putting Built-in Increases into Practice

While it may not be ideal for every landlord or situation, built-in increases do have benefits. As an owner, you may be comfortable in the amount of rent you receive, but what happens a few years down the line. You might realize your rental rate is undervalued, causing you to increase to make up the difference. The effort to recoup profit with a higher than average increase can make your tenants leave. A vacancy could cost significantly more than the gains you would have made. So, a gradual increase over time can avoid the need for drastic rate changes and the potential flight of your occupants. To illustrate this point, let’s look at a quick example.

Gradual Increases from Year-to-Year

Let’s say the rental rate is $1000 per month or $12000 per year. A gradual increase of $25 per year will create an extra $1800 in added income for the landlord over four years. This is beneficial for not only generating added revenue for you, but tenants know what to expect. Additionally, small increases over time are more manageable for a tenant to plan for and can entice them to stay.  Take a look at the example below:

Gradual Increases from Year-to-Year

 

Large or Unexpected Increases

As we discussed above, you may find the rent your charging to be perfectly adequate, but what if one day it isn’t. When you try and increase by significant amounts, it is a shock to the tenant and their wallet. Take a look and the sample below – not only could a nearly $100 increase force tenants to vacate, but you are also leaving profits on the table by not doing small incremental increases.

Large or Unexpected rental rate increases

 

 

Final Thoughts

Rent increases do not have to be an anxious time. By carefully doing your research, maintaining professional lines of communication, and balancing your needs with those of your tenants, success is sure to follow. Are you still unsure what is the best move for your portfolio? Trust the tried and true methods of an experienced rental home management company. Bay Property Management Group understands the needs of both property owners and tenants. We know that lease renewals can be a stressful time, and our goal is to keep great tenants in place while getting the best return on investment for our owners. Give us a call today to see how our comprehensive services can benefit you!