Adjusting your rent price allows landlords to offset the rising costs of ownership such as insurance and tax increases. Landlords typically raise their rental prices by an average of 2 – 3% each year.
Why Landlords Should Increase Rent Every Year
There are several reasons why a landlord may need to increase rent prices each year, including:
- Offset Increasing Property Costs
- Up Your Profit
- Keep Tenants Happier
Offset Increasing Property Costs
Rising operating costs are a big reason landlords need to increase rental prices.
An increase in property taxes, utilities, HOA fees, insurance, maintenance, and repair costs (due to a rise in product cost due to inflation) can seriously affect a landlord’s bottom line.
Up Your Profit
Landlords must be able to sustain at least a small operating profit to be able to cover emergencies, reinvest in their properties, plan for upgrades, and more. It also has to be worth it to you financially to keep up with the hassle of owning a property.
Keep in mind that raising prices to increase profit works best when the going market rate has increased as well.
Keep Tenants Happier
Your tenants will generally be happier with small rent increases every year than a big jump every few years. Raising the rent by $50 or $100 a month with each lease renewal won’t hit a tenant as hard as $300 – $500 every two to three years.
Be sure to add the possibility of a rent increase to your lease terms. This doesn’t mean you will or have to raise the rent, it just offers them a notice that your usual procedure is to raise rent slightly each year.
Some states also limit the percentage of increase a landlord can raise the rent each year.
When Can a Landlord Raise Rent?
The ability to raise rent is determined by the lease itself and local laws and regulations. Generally, rent prices can only be raised at the end of a lease term, unless the lease has a clause for a mid-term rent increase.
If you have a month-to-month lease, the rent can be changed at the end of the month, as long as proper notice is given.
A landlord and tenant may also agree on a rent increase for reasons such as the tenant wanting to get a dog or adding a roommate.
When Can’t a Landlord Raise Rent?
Landlords cannot raise rent whenever they decide. They must follow all state laws as well as the parameters outlined in an active lease. Rent cannot be raised in these situations:
- During the active lease term
- To force a tenant to move out
- If proper notice was not given
- If the raise is due to (or could be construed as) a discrimination issue that violates the Fair Housing Act
- If the raise exceeds the amount listed in a rent control threshold
How Much Can I Raise Rent?
Some states restrict how much rent you can charge and how much rent can increase each year.
Rent Control By State
It is important to set your rental price carefully as you may have difficulty raising your rent in the future.
When Landlords Should Not Raise Rent
There are times when it makes more sense not to raise the rent, including:
- Small or no increase in expenses – If your operating costs haven’t risen or only increased by a few dollars, and you are happy with your current profit margin, it may not be necessary to raise the rent.
- Comparable property rent prices – If your research shows that your rent price is the same or a bit higher than comparable properties, it may not make sense to raise the rent, especially if you have a good tenant. Why would a good tenant re-sign a lease when they can find the same property for a cheaper price?
- High-quality tenant – If you have a high-quality tenant who pays their rent on time and in full each month, it may not be worth the cost to raise the rent. If the tenant chooses not to stay, the time and expense to advertise, screen new applicants, make upgrades, and have a vacant property may be significant.
- Your property doesn’t merit a rent increase – If your property is dated, needs maintenance, and doesn’t offer appealing amenities, raising the rent may be the final straw to having tenants leave and keeping new ones from coming.
4 Steps to Raising The Rent
Here’s the best way to raise the rent in a logical way that doesn’t upset your tenants:
- Review Expenses
- Check State and Local Ordinances
- Investigate Current Market Values
- Consider Previous Rent Raises
1. Review Expenses
Look over your operating expenses over the last year. Compare costs to what you originally budgeted for. This may include:
- Mortgage payments
- Property taxes
- Utilities
- Maintenance
- Insurance
- License Renewal
- Fees (HOA or COA, if applicable)
- Marketing and advertising
- Tenant screening
- Property management service (if you use one)
Determine if your expenses have gone up overall, and if so, how much. Take a look at your rental price and be sure you are at least making ends meet. You also need to leave room for emergency expenses.
Real estate investors need to create enough profit to offer a consistent cash flow and provide enough funds to cover the cost of unexpected expenses.
2. Check State and Local Ordinances
As mentioned, each area has different rules and regulations about how and when a landlord can raise rent. Some states also limit the number of times you can raise the rent, while some have no rules at all.
Learning your local rent increase rules will help you determine if you can raise your rent, and if so, if there is a limit to how much.
3. Investigate Current Market Values
Look at a few rental listing sites to compare the current rental prices of similar homes in your area. Be sure to compare the property details and amenities including:
- Lot size
- Age of the unit and upgrades
- Location
- Number of beds/baths
- Access to a gym, pool, or clubhouse
- Walkability score
- Safety rating, and features (gated, security guard)
If properties similar to yours are listed a few hundred dollars higher than yours, it may be time to raise your rental price.
4. Notify Tenant of Increase
If you have determined you want to raise the rent at the end of the tenant’s lease term, they should be notified. Many states do not have a minimum notice period, but it is a good idea to give at least 30 days’ notice.
If you want the tenant to sign a new lease, it’s also a good idea to write them a letter 60 – 90 days before the lease ends. In the letter, you could notify them of their upcoming lease end date, let them know about the rent raise, and ask them to let you know if they plan to stay.
