Knowing how much to raise the annual rent can be difficult for landlords. On the one hand, you have to cover your expenses such as property taxes, utilities, mortgage interest and repairs. And you have to make money from your rental property as well. But on the other hand, a hike in rent may mean losing a good tenant who may not be able to pay or does not want to pay the increased rates. And local landlord-tenant laws may set annual rent increase limits.
It is usually necessary to consider raising rental prices for tenants when your expenses increase. For example, annual inflation affects the cost of utilities and property maintenance. In addition, property taxes or interest rates on loans may increase, meaning you’ll have a harder time paying the mortgage. Local market rates for rent have gone up, and the current rent is lower than the average rate in your area.
Unfortunately, there is no exact formula for an acceptable annual rent increase percentage. Therefore, there are several factors you should consider before sending a rent increase letter to a tenant – including rent increase laws.
What is a reasonable rent increase in your area? How can you ensure you give your tenants proper notice of a rent increase? And what limits do landlords have when raising the rent?
This article aims to answer your questions about how to increase rental rates every year.
Why do landlords increase the rent?
Landlords typically increase rental prices annually for two primary reasons. First, the costs associated with owning and maintaining a rental property increase annually. After all, you need rental income to cover your expenses and run a successful business. second, rental demand in the neighborhood may increase; Therefore, you can charge tenants more.
As a homeowner, you can’t control some expenses. So, either your profit margin will get hit, or you will have to increase the rent. Here are some common costs that you cannot control that should be included in the rent payment:
- property taxes
- home owner insurance
- Homeowners Association Fee (HOA)
- Monthly mortgage fees with an adjustable rate mortgage (ARM)
- property management fee
- Depending on the terms of the current lease, you may also pay for some utilities.
- emergency repair
However, you will have little control over some expenses. Here are a few examples:
- maintenance
- general repair
- replacement of kitchen appliances
- vacancy cost
Landlords usually have some control over these expenses. For example, let’s say a lawn care company raises its costs. In that case, hiring a different company or adjusting the care schedule may reduce expenses. Consider looking for inexpensive contractors for routine repairs and maintenance. It is good to remember that any increase in your costs without a corresponding increase in rent will impact your profits.
What is the average rent increase per year?
Most landlords choose to raise the rent by three or four percent annually, either to keep pace with inflation or as part of the lease renewal process, with the intention of raising the rent regularly each year. Of course, you can increase the rental value at lease renewal. However, it makes sense to have small annual rent increases rather than significant rent increases every few years. This approach allows for more gradual adjustments in rent prices and provides a more stable and predictable experience for both tenants and landlords.
For example, let’s say you have a long-term tenant and you don’t raise the rent for five or six years, but serve a “rent-increase notice” with a $250 increase. In that case, they may believe that the unexpected rent increase is too significant and may decide to move out. However, the modest $40 increase in annual rent is more palatable.
The good news is that even good tenants expect modest rent increases annually. However, there are several factors you should consider before deciding how much to raise the rent.
- Rent Control Law: Check state and local laws regarding rent controls. For example, a city with rent controls puts limits on rent increases. However, states that don’t have preexisting rent controls or no statewide rent control laws may also regulate how much advance notice you must give tenants before raising rent prices. Additionally, there may be different rules for month-to-month leases or annual leases.
- Check average rental price: It is wise to analyze local market rental trends before sending lease renewal letters with rent increases. If you raise the rent higher than the average, the tenant may decide to move out and not renew the lease.
Of course, you can increase the rent significantly when a new tenant signs a lease agreement. According to the data, the average rent increase across the country between 2021 and 2022 ranged from 4.4% to 29.01%.
how to raise the rent
The most common way to increase rental prices is by sending rent increase letters. However, the lease agreement is the key to increasing the rent annually or month to month. Therefore, you should check the terms of the lease to determine two things:
- When can you give rent increase notice
- allowable rent increase
For example, you may be allowed to increase the lease rent in the middle of the lease term. In such a situation, you can increase the reasonable rent anytime. Or the terms of the lease may state that the rental price may increase with the renewal of the lease. Hence, the notice of fare hike should be a part of the renewal options.
As a rule, it is always easier to communicate with tenants if the rent increase is in the rental agreement.
Before you notify a tenant of an annual rent increase, you should check local laws regarding how much notice you give tenants and how often you can pay rent.
How to notify tenants that you are raising the rent
Clear communication with tenants is important when you raise the rent. Most laws require landlords to give tenants at least 30 days’ prior written notice. However, you may need to explain why you are increasing the tenant’s rent. Making sure the tenant has affordable rent while still covering your expenses will help retain good tenants.
Here are some tips on how to inform a tenant about a future rent increase:
- Send formal rental notice two to three months in advance
- Convince the tenant that increasing the rent will help you keep the property
- Mention average rental prices or increases in local neighborhoods
- Be polite and firm when discussing rent increase percentages
- Include a rent increase clause in the renewed rental agreement, if necessary
Maintaining good relationships with reliable tenants is one of the keys 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 struggle to pay rent on time.
How Much Notice Do You Need to Give Tenants?
The landlord-tenant laws of the state, city or town govern the period of time you must serve before sending an advance rent increase notice. Typically, tenants can expect at least 30 days’ notice. However, some city laws require you to give tenants 90 days advance notice of future rent increases.
It is generally a good idea to consult with a landlord-tenant attorney before sending a notice regarding a rent increase.
When a Landlord Can’t Raise the Rent
If landlords comply with local laws, they can raise the rent. Maximizing annual rental income 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 does not allow it. For example, you cannot increase the rent during a fixed-term lease or if the lease renewal options do not include a rent increase notice.
- Rent Control Law: Tenants living in rent-controlled apartments are protected against some increases in rent prices. In addition, some cities also have additional rent controls with strict rent increase limits.
- the revenge: You cannot increase the rent rate in retaliation for the tenant’s actions. For example, let’s say the tenant reports you for lease violations. In that case, you cannot get back to them by increasing the monthly rent amount.
- Rent hikes are a violation of the Fair Housing Act: Any rent increase that appears to be discriminatory is illegal, regardless of where your rental property is located. The Fair Housing Act prohibits discrimination when renting or buying a home across the United States. For example, you cannot increase the rent if your tenant has a child, changes religion, or becomes disabled.
Is there a limit to how much a landlord can increase the rent?
The maximum amount by which a landlord can increase the rent generally depends on three factors.
Firstly, it is important to check that the rent increase does not exceed the limits of 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 is prudent to increase the rent by a reasonable and realistic amount that is good for you and your tenants.
So, what is a typical rent increase? Although there is no specific percentage that universally defines an increase in typical rent, it typically ranges from 3 to 5 percent annually. However, this may vary depending on factors such as location, market conditions and local regulations. It is important to consider these factors and ensure that any rent increase is reasonable and within the limits set by law.
How much should I increase the rent?
How much you decide to raise the rent depends on much more than local rent control ordinances. It is important to consider factors such as local rent calculation, seasonal demand, general rental demand and location. However, the cost of inflation and other external factors may influence your decision on how much to raise the rent annually.
Find Financial Freedom Through Renting
If you are considering using rental properties to build wealth, this book is a must read. With nearly 400 pages of in-depth advice on building wealth through rental properties, book on rental property investing Provides practical and exciting strategies that investors can use to generate cash flow and build wealth.
Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BiggerPockets.
