If you have been a landlord for a while, then you have likely been faced with the dilemma of when and how to raise the rent on your tenants, and whether you should even consider it in the first place.
How much should you raise the rent?
How should you go about telling your tenants that they’re going to be paying more?
And what if they don’t want to pay more?
If you want to raise your current tenant’s rent, it’s important to know the ins-and-outs of the process.
In fact, you'll want to make sure that you are even able to increase rent, because many cities across the US have implemented rent control laws and ordinances that dictate when, how, and how much you're able to increase rent by.
With that being said, here are some tips that will help you know when and how to raise rent on a tenant, as well as whether you should even do it in the first place.
Determine if raising the rent makes sense
There are those in the rental industry who would argue that in many cases, you may not want to raise rent on a tenant - especially a "quality" tenant.
In this scenario, a "quality tenant" would be defined as a tenant who routinely pays rent on time, treats the rental as if it were their own, and generally has little to no communication to or from the landlord - a low maintenance tenant, in other words.
As the theory goes, high-quality tenants are hard to come by.
When you have one, the easiest way to keep them is to keep them at a low rent price, even when everybody else in your rental market is going up.
That way, even if they did want to move out, they'd be hard-pressed to find a comparible rental at the same price-point that they're enjoying at your place.
As a result, they tend to just renew every year, or you don't even send them a renewal at all. Some landlords just let the lease roll over month to month.
After a while, the tenant might eventually start to think that maybe you forgot about renewing them at a higher rate - and to avoid bringing attention to that fact - the only time they ever reach out to you is to submit the occasional maintenance request.
Prime Example: A Short Story
Case in point; I was involved in a conversation today where a landlord has a great tenant who has lived at her rental property for 8 years, and she's never raised the rent.
The tenant has been on the same rental agreement, and has paid $3,000/month consistently for 8 years, with little to no troubles.
However, the market rent in her area has increased every year, to where her rental is now actually worth at least $3,600 per month.
The debate was whether or not she should increase the tenants rent now.
In general, the overwhelming opinion of everybody involved in the conversation said, "NO! Do NOT increase the monthly rent on this tenant".
That being said, there were a few who suggested that she should give the proper notice on the next renewal offer, and start doing incremental increases in rent each time the lease is renewed, or, even building in a rental increase every 6 months on an 18 - 24 month lease agreement.
Their reasoning?
While most tenants generally expect to receive rental increase notices in the range of 2% - 4%, rarely will a tenant be OK with receiving a rental increase of 10% or more all at once.
A >10% rent hike is generally not considered a reasonable rent increase in most cases.
Trying to increase rent by such a significant percentage in one go is almost a sure-fire way to lose a good tenant and increase tenant turnover rates.
That brings us to the two primary questions you may want to ask yourself when considering if you should increase the rent:
Does a rental increase support your financial goals?
In the case of the landlord I just told you about, it was NOT a matter of if she NEEDED the additional revenue each month. It was simply the fact that the additional revenue to be gained would definitely be from a legitimate increase because the current rent was so far below the market rate.
And even though she had a good tenant, the rental increase would certainly benefit her rental business in the long run. But the impact on the long-term tenancy was of most concern.
The question was designed to get a feel for whether or not it was a wise business decision.
In general though, rental increases should be closely aligned with your financial goals.
Financial goal questions you should ask yourself:
1) Are you working towards purchasing additional properties?
2) Are you trying to refinance the property in the near future?
3) Are your property taxes routinely going up and are they substantially higher now than at the start of the original lease?
4) Does the rental property need the additional cash-flow to maintain pace with the repairs and preventative maintenance it needs right now, or will need in the near future? Will the increased rent help accomplish that goal?
5) Are you planning on positioning and selling the rental property as an investment property to another investor in the near future?
If the answer to any of the above questions is "Yes", then chances are, you should probably be increasing your rental rates every time the lease is up for renewal.
Additional financial goal questions you should ask yourself:
On the flip-side, there are always downsides to this scenario as well.
Here are some questions you'll want to answer for yourself:
1) Can you afford to lose the high-quality tenant that you currently have?
2) Are you prepared to have to find another tenant in the event that they choose not to renew?
3) Are you prepared for the cost of turnover, and possible "down time" of the unit while it is unoccupied and losing rental revenue each day that it remains vacant?
4) Are you ok with understanding that you will likely end up with a much more difficult and time-consuming tenant when the new tenant moves in?
If you answered yes to any of those questions, then you may want to reconsider raising rent on your current tenant.
Even if you do decide to raise your tenant's rent, there are limitations.
Which brings us to our next question...
Does your local market support a rental increase?
Regardless of how much you might WANT to increase the rental rate, the question is, does your market support a rental increase?
A wise investor once told me that if the market doesn't support $10,000 per month rents, then you'll never get it, even if you install gold-plated surfaces throughout the house.
That same principle applies to every rental market.
No matter how nice you renovate the building, no matter what amenities you offer, no matter where it's located - if the local market simply does not support a rental increase, then it's probably best to not even try.
Otherwise you will end up with an empty rental, and a ton of turnover costs while you spend even more money trying to get a new tenant in.
Also, if the rental market is only commanding a price point of $50 more per month in your market - do you risk increasing your rent by $50 at renewal time, JUST to keep up with the market? Or do you keep the rental rate the same to make sure that you retain a quality tenant, and avoid the high turnover costs that always accompany a move out?
At the end of the day, there is no cookie-cutter answer to the question of when, or if, you should raise rent on your tenant.
But these questions will serve as a guide on the path towards making the best decision for your rental property.
How to raise rent on a tenant
In the event that you decide that you want (or need) to increase the rent for your tenant(s), then you'll need to understand the best practices on how to go about rental increases as well.
Nearly every lease has (or should have) a clause in it that dictates the process for increasing rent.
Generally - with residential leases - you are only allowed to raise rent on a tenant when their current lease is up for renewal. The lease will also typically outline what time frame you are required to notify the tenant beforehand of any rental increases, to give the tenant an opportunity to accept or decline the rental increase offer.
In Texas, for instance, most leases require that the landlord provide the tenant with a 60 day notice of a rental increase, while other leases may require as little as 30 days, or as many as 90-120 days.
The method by which you are required to notify the tenant is typically by physical letter which you can send either by certified mail, or via hand-delivery.
It's rare that electronic methods are currently acceptable for renewal or rent increase notices.
How to tell tenants of the rent increase
In general, most tenants expect to receive rent increase notices at the time that their current lease expires.
That being said, there are creative and informative ways that you can tell your tenants about the rent increase, as opposed to simply saying, "Hi, we'd love to renew your lease. Here are your options".
A common complaint from tenants who receive renewal offers is that you have not done anything to "improve" the rental property, and nothing has changed in the neighborhood to cause a rental increase, so why would they pay a higher rental rate?
That is where consumer education comes into play, and you have the opportunity to justify the rental increase by providing helpful information to the tenant as to where your rental increase is coming from.
Here is a rental increase sample letter of how some property managers do that.
How to inform tenants of the rent increase process
When you send the letter to your tenants informing them of the rental increase - should they decide to renew - it's also important that you have a clearly defined process for how they can go about renewing at the higher rate.
Most landlords and property managers offer various options for renewals.
Example
A tenant is currently paying $1,000 per month, and they are sent a renewal offer which includes the following options:
Option 1: Rental Increase of $50 for a total of $1,050/month on a 12 Month Renewal
Option 2: Rental Increase of $25 for a total of $1,025/month on an 18 Month Renewal
Option 3: Non Renewal. I will turn in keys on the final day of the lease by 5:00 PM local time.
The renewal offer letter typically has the option for them to check a box, sign and date the document and return it to the property manager so that the renewal lease document can be created and sent to the tenant to sign.
In the event that the tenant opts for a non-renewal, it's equally as important to have a very specific move out process for them to follow which should be included in follow up communication after receiving their decision not to renew.
The letter also typically includes a deadline, and after that deadline, the rate may be subject to change and/or the lease renewal offer may be retracted entirely and the rental unit placed on the market. This creates a sense of urgency for tenants to make a decision quickly.
Tenant rental increase recap
To recap the question of how to do a rental increase for your tenants, lets revisit the following:
1) Decide if you should do a rental increase at all based on your market and your financial goals.
2) Create a letter clearly outlining the rental renewal options for your tenant.
3) Clearly define the renewal process and provide a deadline for when the tenant needs to make a decision.
4) Be prepared for a non-renewal notice from the tenant in return and have a very clear move-out process for them to follow to make everybody's lives easier at the end of the lease term.
Follow these steps when working on renewal offers for your tenants. You will find life much easier going forward and, hopefully, reduced turnover costs as a result of losing high-quality tenants.