Rent increases are a normal and even expected part of any rental property business. Moreover, unless local law includes rent control policies, landlords are free to increase the rent as they see fit. While the goal for all investors is to make money, relying on rent increases to do so can easily backfire. Instead, any jump in rent must be carefully calculated and fall in line with the local market. So, with many variables to consider, we review how to determine fair market rates and avoid costly vacancies. Check out this helpful guide to rent increases below.
Legal Issues to Consider Before Increasing Your Rent
In most jurisdictions, there is no restriction on raising the rental amount. That said, always check for applicable rent increase legalities before notifying the tenant of any potential changes. Even if the law does not dictate how much a landlord can ask for, there are still some guidelines to follow. This helps maintain the opportunity for fair housing and avoid the following situations –
- Increases Based on Discrimination – Landlords cannot increase the rent based on any circumstance protected by Fair Housing Law. Under Federal law, this includes discrimination based on gender, sex, race, national origin, religion, disability, or familial status. That said, states and local jurisdictions can also have additional protections for source of income, gender identity, or age, just to name a few. Therefore, raising rent based on any of these factors is grounds for a potentially devastating discrimination lawsuit.
- Raising the Rent in Retaliation – For example, if the tenant exercises their rights and files a complaint against the landlord and rent spikes immediately, this is suspicious. Not only is this poor management, but situations such as this can also lead to costly retaliation claims. That said, ensure all rent increases are reasonable and occur in the correct timeframe (g., at the time of renewal) to be beyond reproach.
Other Examples of When Not to Raise Rent
- Attempting to raise the rent during the term of the lease.
- When the lease does not allow for a rent increase.
- If proper rent increase notice was not given to the tenant per the lease or law.
- The increase is an attempt to force a tenant out of the property.
What Are Some Legitimate Reasons for Rent Increases?
Raising the rent on your rental property is a delicate balance of owner wants, property needs, and tenant interests. While tenants may be dissatisfied with an increase in their rent, it is sometimes warranted. Check out this list below of common and legitimate reasons to seek a boost at the next lease renewal.
- The market is hot, and landlords can justifiably charge more based on local comps.
- Property taxes, insurance, HOA, or other fees have increased, and owners need to offset the cost.
- The property requires maintenance or repairs.
How to Raise Rent the Right Way
Rent increases can have a significant positive or negative effect on your rental business if not done carefully. So, before making the jump in rates at your property, consider these important points below.
Determining if Your Rental Rates are Legally Compliant
Before deciding to increase a property’s rent, make sure it is not located in a rent-controlled area. This legislation sets limits on rental rates and increases based on various factors, and landlords must comply. At the same time, rent control areas are generally confined to major cities, always double-check to avoid any legal disputes. In addition, these statutes may do any of the following:
- Limit the frequency of rent increases
- Regulate the timing of rent increases
- Determine reductions in services
- Permit special rent increases
- Limit the eviction process of some tenants
Did You Know? – While Oregon is the only location with statewide laws regarding rent control, other localities across the nation have rules in place as well. These include jurisdictions in Washington DC, California, New York, New Jersey, and Maryland.
How to Calculate Rent Increases
Raising the rent on an occupied property is always a risk. On the one hand, it equals increased profit margin; on the other hand, the tenant could vacate instead of paying the higher rate. Therefore, landlords must tread carefully when raising the rent. Zillow reports that 78% of renters in 2019 experienced a rent increase. However, 55% of them cited the rent increase as the main factor in their decision to move. So, with that in mind, here are some handy tips for determining your rental rate increase below.
Tips for Determining Fair Rental Rates
- Know the Area – Research the local area and see how much other rentals are going for. Furthermore, be sure to research rentals on the market and ones recently rented for a more comprehensive market snapshot. Also, measure current rates against properties similar to yours in terms of features, age, structure, and visual appeal. The key is to remain competitive but not overpriced.
- Use an Estimator Tool – Keep in mind that while an average rent increase of 2 to 5 percent annually is considered normal, some locations can exceed that percentage by as much as three additional percentage points. One way to see how your property falls in line with the local market is by using a rent estimator tool.
- Consider Local Demand – Regardless of what landlords think the property is worth if demand is low and there are ample units on the market, increasing the rent can drive tenants away. Therefore, landlords must balance increases with demand because a vacancy is far more expensive in the long run.
- Cover Your Expenses – When deciding the rental rate, consider any increased expenses on your end during the lease. For example, did the HOA or insurance premiums increase? If so, this should factor into the rental increase amount.
Blindly increasing a rental property’s rent is never a good plan of action. After all, this could lead to vacancy rather than increased profit potential. So, do not take any chances! Instead, do your due diligence and calculate a rent increase the right way.
Always Provide Proper Notice of Rent Increase
Landlords cannot simply raise the rent whenever they want. Often, when and how much they can request depends on local law and the lease itself. Typically, rent increases occur during the lease renewal process, and landlords must provide ample notice. However, depending on the location of the property, local law may vary. In addition, the type of lease term can also affect the amount of notice required.
For example, Maryland landlords must provide month-to-month tenants a minimum of 30 days’ written notice of rent increases. That said, Montgomery County and Baltimore City require 60 days’ written notice, with some exceptions. For long-term leases, landlords must wait until the existing lease is up for renewal. Then, they also need to comply with notice requirements per the lease which can range from 30 to 90 days.
When to Raise Rent on a Vacant Property?
If your rental property is currently vacant, the terms for increasing the rental rate are far more flexible. So, if landlords want to implement an increase before placing a tenant, start by advertising at an appropriate rate for the market. Then, depending on what happens from this initial advertising, landlords can determine their next steps.
- What if Nobody is Interested? – If you find the property is not receiving enough attention – price could be an issue. Chances are that the rate is too high and scaring off qualified prospects. On the other hand, savvy renters know the local market and are looking to get the most bang for their buck. So, if there is no interest, consider a price reduction.
- How About Lots of Interest, But No Bites? – If the schedule of showings is bursting at the seams, but no applications are rolling in, there is a problem. That said, this could relate to over advertising and under-delivering, price, or a number of factors. Either way, take another long look at whether your property lives up to the hype.
- What if Everyone Wants in? – A flood of interested tenants could leave landlords questioning whether they are charging enough. If that is the case, you cannot do much since the rent rate is set. However, this is an excellent sign that a rent increase is warranted at renewal time.
Leave Stress Behind with Qualified Management
Deciding to increase the rent on your investment property is a big step. Therefore, be sure to consider all options, research the local market, and evaluate each tenant on a case-by-case basis before making this change.
At Bay Management Group, our knowledgeable property managers are well versed in handling rent increases. In addition, we specialize in all things rental management. Thanks to our dedicated staff, BMG makes the entire rental process more efficient, including marketing, leasing, accounting, maintenance, compliance, inspections, rent collection, and customer service. So, if you own Philadelphia, Laurel, or Washington DC rental property and are looking for an exceptional property management company to help maximize your investment, contact Bay Property Management Group today.