Owning and operating rental properties is quite costly. After all, you have to consider taxes, utilities, and property management services. Unfortunately, these costs go up over time, leaving landlords with even higher expenses. To compensate for rising costs, landlords may have to increase rent each year. However, it’s essential to know the laws and proper ways to inform tenants of rent increases. Read along as we go over best practices for increasing rental rates.
Contents of This Article:
- How Much Should You Increase Rent Each Year?
- When Can a Landlord Raise Rent Prices?
- When Can They NOT Raise Rent Prices?
- Determining Rent Increases Each Year
- Proper Ways to Inform Tenants of Rent Increase
- How Can Rental Property Management Help?
How Much Should You Increase Rent Each Year?
If anyone’s familiar with rent increases, it’s Washington, DC property managers and landlords. Knowing when to raise rental rates is important to owning and managing properties. So, let’s go over how much to increase rent each year and the average year-over-year rental increase.
From 2017 to 2022, year-over-year rental rates have increased by nearly 6% across the United States. The largest increase was from 2021 to 2022 at over 14%. That said, although rates increased throughout the US, some states were affected more than others.
Deciding how much to increase rent each year may depend on the location of your rental property. Each state has different laws and limits on rent increases in any given year. So, an increase in one city may result in fines in another. As such, landlords need to be aware of all local rental laws.
Next, let’s go over some instances where a landlord can raise rent and when they cannot.
When Can a Landlord Raise Rent Prices?
Landlords can raise rental rates during a lease renewal, whether a month-to-month or a year-long lease. They could raise the rent at any time if it’s a month-to-month lease. Additionally, new tenants are not guaranteed the same rate as the previous tenant when they move into a rental.
However, there are limitations for some rental housing per local or state laws. For instance, the government may control how much you can increase rent for Section 8 housing. As such, staying up-to-date with your state and local laws is crucial. Next, here are a few instances where landlords cannot raise rent prices.
When Can They NOT Raise Rent Prices?
Landlords must raise rent periodically to keep up with rising expenses. However, there are certain times when it may be illegal to raise your rates. For instance, if the lease hasn’t expired, you must wait until the renewal date to increase. A few other scenarios where increases may not be permitted include:
- It’s written in the lease that rent will not increase upon renewal
- The rate increase was retaliatory or discriminatory
- You never presented the tenant with a rent increase notice
- State or local laws prevent rent increases
Determining Rent Increases Each Year
There are several reasons and factors that lead to increasing rental rates. That said, if you have reason and you’re legally allowed to raise your rates, you need to calculate a new rate. If you set rates too high, you could lose tenants. However, you could lose profits if you don’t increase it enough. So, here are a few factors to help you determine rent increases each year.
- Calculate Operating Expenses
- Research Comparables
- Stay Informed on Market Trends
Calculate Operating Expenses
Before determining a new rate, find out how much you spend on the rental property each year. Then, add up all of your costs from the past year and look over any increases or changes in your expenses. It’s important to look at the entire year, as monthly expenses differ.
Once you add up all your expenses and have a year total, divide that by 12. The number you get is the minimum you need to cover monthly expenses and break even. You can use this to set rates that will help you profit.
Research Local Comparables
When deciding on rate increases, you’ll want to look at the local area and comparable rentals to see what other landlords charge each month. Looking at rental comps can help determine how much your property can earn and the ideal monthly rental rate.
Although no two homes are the same, landlords should look at properties in a specific location to consider the market value and rental rates. Additionally, it’s important to look at different property types and sizes, along with amenities and other factors. Each of these plays a significant role in rental rates and can help you create a fair rate for your property.
Stay Informed on Market Trends
The rental market is constantly changing and evolving each year, and prices can change in the blink of an eye. So, before thinking about raising your rent prices, look at market trends for your local area.
For instance, you want to know how market trends affect tenants. Are renters moving when rent prices go up? If so, you might want to be careful about how much you increase rent each year. However, if the market favors higher rates, you may be able to make more significant increases.
Proper Ways to Inform Your Tenants of Rent Increases
You can’t just raise your rental rates out of the blue without warning your tenants. Most state laws require landlords to wait until a lease agreement is up and properly inform tenants of changes. As such, here are some proper ways to increase rent each year.
- Give Proper Notice- The most crucial part of increasing rates is giving your tenants a head up about it. Giving at least 60 days’ notice can give your tenants enough time to consider whether they’ll renew their lease at a higher rate or find a new place to live.
- Be Upfront About It- If you know that you want to implement increases each year, you can be upfront about it and include it in your lease agreement. For instance, include a clause in your lease that states there will be an increase each year.
- Send a Formal Letter- Giving proper notice is crucial, but verbally informing your tenant of rent increases is not enough. You must send tenants a formal letter by certified mail that shows proof that the letter was sent.
How Can Rental Property Management Help?
An essential part of owning rental properties is deciding how much to increase rent each year. While it’s not always an easy decision, landlords have to keep up with rising expenses and local competition. However, keeping up with state and local laws is crucial when determining rent increases.
Need help managing properties and tenants while staying compliant with local laws? If so, you’ll want to find a comprehensive rental management team. Bay Property Management Group is a top-notch rental property management company serving major areas like Baltimore, Philadelphia, Northern Virginia, and Washington, DC. Contact BMG today to learn more about our services.