As a landlord, before you do notify a tenant of a rent increase, be sure you know when you can increase the rent and when the increase can become effective.
Except in places with rent control, your legal right to increase the rent is primarily controlled by whether there is a lease in place or if it is a month-to-month agreement. In most places, once a lease expires it defaults to a month-to-month agreement if a new lease is not signed. The two most likely times to notify a tenant of a rent increase are shortly before a lease ends or at any time during a month-to-month agreement. When the rent increase becomes effective is typically controlled by state and local laws. In many places, a 30-day notice is required but 60-day notice is not unusual.
Keeping Up With Landlord Expenses
Every landlord wants their property to have a positive cash flow and return a reasonable profit. However, some landlords become complacent about raising the rent. Complacency is not a good landlord practice. But it can be caused by a variety of reasons. Some landlords get to know their tenants and become uncomfortable asking for a rent increase. Others don’t think that a slight increase in their expenses is worth passing on to the tenants in the form of something on the scale of a $10 a month rent increase. Other landlords just think they’ll wait for a new tenant to move in before raising the rent. All of these are bad businesses reasons for not raising the rent. If you’ve become complacent about raising the rent, you can expect your tenants to stay for an exceptionally long time because they are getting such a good deal on the rent while all their other expenses are going up. And when you do raise the rent substantially, these tenants will think you are being unreasonable.
A good business rule of thumb is reevaluating the rent every time a lease expires and every six months for month-to-month tenants. There are several reasons for raising the rent. It could be that neighborhood rents are going up in general. It could be that you’ve made improvements or added amenities that your tenants are enjoying. But the most frequent reason is good ol’ inflation. As a landlord, your expenses are going up and these need to be passed on to your tenants. You may have unique expenses but here are the basic expenses that you want to pass on to tenants.
- Property taxes
- Higher utility costs (including common areas)
- Insurance premiums
- Property management costs
- HOA dues
- General cost-of-living expenses
You calculate these on an annual basis, spread them across multiple units if necessary, and divide by 12 to arrive at a monthly rent increase on a per-unit basis. Don’t forget to recalculate your profit margin at the same time. As total rent increases, you need to add a little more to maintain your profit margin as a percentage.
The goal of any landlord is to stay competitive with market rents while having as little tenant turnover as possible. Know your local market but a general rule of thumb is a 3% to 5% increase each year.
Written Notice of a Rent Increase
Always verify the minimum amount of time required to give notice in your jurisdiction and how notice of a rent increase must be given. Almost always, a written signed letter is required, and in some places, certified mail is required. Verbal notices and emails are never good ideas.
At the time of a rent increase and/or expired lease is also when you may need to notify tenants of any changes in terms, conditions, and rules going forward. For these reasons and to document the rent increase, a new contract is needed. A new contract or notice of a change to month-to-month tenancy needs to document the rent increase even if there will not be a new lease period.
A rent increase letter simply states the facts. Here is an example.
Your current lease will expire on January 31, 2022. I look forward to you remaining a tenant under all the same terms and conditions of the current lease except for a modest rent increase. As you know, the cost of living affects us all. This includes the cost of providing rental housing that I must pass on to you. Effective with the new lease that will begin on February 1, 2022, your rent will increase by $XX each month. Your new rent monthly amount will be $XXXX.
I sincerely hope you will find this increase to be acceptable and will sign a new lease agreement. In the event that you do not agree to the rent increase, you will need to give me notice according to the current lease and vacate the residence by January 31, 2022.
This is simple and to the point. It should not cause any confusion for the tenant. If you have any changes to the rule or conditions, you include those in the letter. Also, include a copy of the new lease with instructions to return it to you by a specific date. If they don’t want to sign it or refuse to pay more rent, give the 30-day notice to leave (some places require 60 days). Be sure to check your lease and local laws to make sure your written communication complies with any relevant requirements.
Dealing with Complaints
Most renters expect a rent increase at the end of a lease. If the rent increase is reasonable, you should not expect any complaints but there are a few things that you can do to minimize any complaints that you do receive. The most common complaint is giving too short of notice. Legally you may only be required to give 30 days’ notice but giving more time allows the tenant to adjust their budget if they need to and gives both of you more time to sign a new lease.
Another common problem is when you don’t have a good relationship with your tenants. If you haven’t made repairs or performed maintenance in a timely manner, the tenant might not think a rent increase is justified. These are things that you need to take care of during the old lease. There might be little you can do when a lease is expiring, and you are asking for a rent increase.
Although not a complaint, some tenants will ask why you are raising the rent. One way to deal with this is by asking the tenant if they have received a cost-of-living adjustment during the past year and politely pointing out that is what you are doing with a rent increase. Another way is to summarize your expense increases (property taxes, insurance, etc.). You don’t need to put any of this in writing. A verbal explanation is enough. If you’ve made improvements, also mention those.
Although not typical, if you are expecting complaints, you can offer your tenant a way to save some money. You can send the rent increase well in advance (90 days in advance) with an incentive to renew the lease early. You could offer a smaller rent increase of 3% if they renew the lease 60 days early or it will be 5% if they wait until the last minute to renew.
No tenant wants a rent increase, but reasonable tenants expect it. The more structured your rent increases are, the less of a surprise it will be to tenants and the fewer complaints you will receive. Your next lease can include specified advance notice requirements. When increases are more predictable, they become more accepted by your tenants.
How have you successfully dealt with rent increases? Please comment.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, near a national and the Pacific Ocean.