Knowing how much to raise yearly rent can be tricky for landlords. On the one hand, you must cover your expenses like property taxes, utilities, mortgage interest, and repairs. And you also have to make money from your rental property. But on the other hand, a rent hike could mean losing a good tenant who maybe cannot afford or doesn’t want to pay the increased rates. And local landlord-tenant laws could set annual rent increase limits.
Considering raising rent prices for tenants usually becomes necessary when your expenses increase. For example, annual inflation affects the cost of utilities and property maintenance. Also, property taxes or interest rates on loans could rise, meaning you have difficulty paying the mortgage. Market rates for rent have increased, and the current rent is lower than the median rate for your area.
Unfortunately, there is no precise formula for an acceptable annual percentage increase. Therefore, you must consider several variables — including rent increase laws — before you send a rent increase letter to a tenant.
What is a reasonable rent increase in your area? How can you ensure to give your tenants proper notice about rental increases? And what limits do landlords have when making rent increases?
This article aims to answer your questions regarding how to increase rental rates every year.
Why Landlords Raise Rent
Landlords typically raise rent prices annually for two primary reasons. First, costs associated with owning and maintaining a rental property increase yearly. After all, you need rental income to cover your expenses and run a successful business. Second, there may be increased demand for rentals in the neighborhood; therefore, you can charge tenants more.
As a landlord, you cannot control certain expenses. So, either your profit margin takes a hit, or you must raise the rent. Here are typical costs you cannot control that rent payments must cover:
- Property taxes
- Landlord insurance
- Homeowners Association fees (HOA)
- Monthly mortgage fees with an Adjustable-Rate Mortgage (ARM)
- Property management fees
- Depending on the current lease terms, you may also pay for certain utilities
- Emergency repairs
However, you have some control over certain expenses. Here are a few examples:
- General repairs
- Replacing kitchen appliances
- Vacancy costs
Landlords typically have some control over these expenses. For example, suppose the lawn care company increases its costs. In that case, hiring a different company or adjusting the care schedule may reduce expenses. Consider looking for cheaper contractors for regular repairs and maintenance. It’s good to remember that any increase in your costs without making a reasonable rent increase eats into your profits.
What Is the Average Rent Increase per Year?
Most landlords raise the rent annually by three or four percent; however, some decide to raise the rent price to keep pace with inflation. Of course, you choose to increase the rent price upon the lease renewal. However, making small annual rent increases rather than a significant rent hike every few years makes sense.
For example, suppose you have a long-term tenant and do not increase rent for five or six years but present a “raise-the-rent notice” with a $250 hike. In that case, they may assume the unexpected rent increase is too significant and decide to move out. However, raising the rent yearly by a modest $40 is more palatable.
The good news is that even good tenants expect a modest rent rise annually. However, before deciding how much to increase the rent, you must consider several factors.
- Rent control laws: Check state and local laws regarding rent control. For example, a city with rent control puts limits on rent increases. However, even states with preempt rent control or no statewide rent control laws may regulate how much advance notice you must give tenants before increasing rent prices. Additionally, there may be different regulations for month-to-month leases or yearly leases.
- Check the average rent price: Analyzing local rental market trends is wise before sending a lease renewal letter with a rent increase. If you increase rent by more than the average, the tenant may decide to move out and not renew the lease.
Of course, you can increase rent significantly when a new tenant signs the lease agreement. According to statistics, average rent increases across the country ranged from 4.4% to 29.01% between 2021 and 2022.
How to Raise Rent
The most common way to raise rental prices is to send a rent increase letter. However, the lease agreement is the key to raising the monthly rent. Therefore, you must check the lease terms to determine two things:
- When can you give a rent increase notice
- The allowable rent increase
For example, you may have a lease term allowing for a mid-lease rent rise. In this case, you can make a reasonable rent increase anytime. Or the lease terms may state that the rent price may increase with the lease renewal. Therefore, a notice of rent increase should be part of the renewal options.
As a rule, it always makes it easier to communicate with tenants if rent increases are in the rental agreement.
Before notifying the tenant of an annual rent increase, you should check local laws regarding how much notice you give tenants and how often you can pay the rent.
How to Notify Tenants You Are Raising Rent
Clear communication with tenants is crucial when you make a rent increase. Most laws require landlords to give tenants written notice at least 30 days in advance. However, you may need to explain why you are raising the rent to a tenant. Ensuring the tenant has affordable rent while covering your expenses will help keep good tenants.
Here are a few tips on how to notify a tenant about a future rent increase:
- Send a formal rent notice two to three months in advance
- Explain to the tenant that the increase in rent will help you maintain the property
- Mention the average rent prices or growths in the local neighborhood
- Be courteous and firm when discussing the rent increase
- Include a rent increase clause in the renewed rental contract if necessary
Keeping good relationships with reliable tenants is key to being a successful landlord. The National Association of Realtors reports that 69 percent of tenants make sacrifices to pay their rent. Additionally, 23 percent of men side hustle to make on-time rent payments.
How Much Notice Do You Need to Give Tenants?
State, city, or town landlord-tenant laws regulate the period you must give before sending an advance rent increase notice. Typically, tenants can expect at least 30 days’ notice. However, some city laws may require you to warn tenants about a future rent increase 90 days in advance.
It is generally a good idea to consult with a landlord-tenant attorney before sending notice regarding a rent increase.
When a Landlord Cannot Raise the Rent
Landlords can increase the rent if they comply with local laws. Increasing rental income annually is often the only way to run a successful rental business and keep rental units well-maintained. But what are the circumstances when a landlord cannot raise the rent?
- Lease terms: You cannot raise rental rates if the current lease agreement doesn’t allow it. For example, you cannot increase the rent during a fixed-term lease or if the lease renewal options did not include a rent increase notice.
- Rent control laws: Tenants living in a rent-controlled apartment are protected from certain hikes in rent prices. Also, some cities have additional rent controls with strict rent increase caps.
- Retaliation: You cannot increase the rate for rent in retaliation to a tenant’s actions. For example, suppose the tenant reported you for a lease violation. In that case, you cannot get back at them by bumping up the monthly rent amount.
- The rent increase violates the Fair Housing Act: Any rent increase that appears discriminatory is illegal, regardless of where your rental property is located. The Fair Housing Act prohibits discrimination across the United States when renting or buying a home. For example, you cannot increase rent if your tenant has a baby, changes religion, or becomes disabled.
Is There a Limit on How Much a Landlord Can Raise Rent?
The maximum amount landlords can increase rent generally depends on three factors.
First, it’s vital to check if a rent increase does not exceed the threshold in local rent control laws. Second, the terms of the lease agreement may limit how much you can raise the rent. The third factor is affordability. It makes sense to raise rents by a fair and realistic amount that is good for you and your tenants.
How Much Should I Raise Rent?
How much you decide to raise rent depends on more than local rent control ordinances. Considering factors like local rental comps, seasonal demand, general rental demand, and location is crucial. However, the cost of inflation and other external factors can impact your decision on how much to increase rent annually.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.