- Investors should make note of local market values when considering a rent increase.
- Pay attention to rent increase laws to ensure you act in accordance with local regulations.
- A notice of rent increase letter should be straightforward and clear.
As an investor, one of the ways you can boost your income is to raise the rent. However, there is a fine line when it comes to instituting rent increases that investors should be careful to walk. Increase it too much and you risk losing tenants; fail to increase it at all and you risk earning less than market value on the property and ultimately risk losing revenue. Continue reading to find out the right time and way to announce a rent increase to your tenants.
What Is A Rent Increase?
A rent increase is exactly what it sounds like: a landlord or property manager deciding to increase the amount of rent tenants pay. A rent increase can occur in a number of ways, but is typically enacted as the market value of a property increases. When done carefully, a rent increase can help boost the amount of revenue from your investment while helping to ensure tenants remain happy with the quality of the property they are renting. When it comes time to increase the rent, investors should rely on a proper rent increase letter to ensure they directly communicate to tenants and follow local regulations.
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Benefits Of A Rent Increase
There are numerous benefits to increasing the rent as a property manager or owner, the most obvious being more cash flow. By increasing the amount of rent tenants pay, you are boosting the amount of money you receive each month. Those funds can then be used for a number of costs that come with owning an investment property, from mortgage payments to general maintenance. If you find yourself in the midst of a property that has increased in market value, a rent increase could mean more cash flow going directly to you.
The benefits of a rent increase also include having a larger budget for structural improvements to the rental property. As I touched on before, by boosting the amount of money you receive from your tenants each month you will be able to boost the amount of money available to improve the overall condition of the property. If your property features outdated appliances or structural issues, the increase in rental revenue could be a great way to finance some renovations. Similarly, an increase in rent could provide you with the finances to add additional amenities, which could boost the property value further.
Rental increases will also allow you to ensure your property keeps up with the local real estate market. If property values and rents are increasing in your market area, you will want to ensure your property follows the same trajectory. The best way you can do this is to maintain your property’s good condition and pay attention to market factors when determining rental prices. Above all else, your rent should be increased based on the rental market.
Potential Drawbacks Of A Rent Increase
Perhaps the most obvious drawback of a rent increase is the potential to lose tenants and not be able to fill vacant units. Due to this risk, you may find yourself searching for a friendly rent increase letter, or avoiding raising the rent altogether. However, it is worth noting that if you go about the situation correctly you will be able to avoid losing tenants to a rent increase. One way to do this is to review lease agreements and applications to ensure that the tenant will be able to afford the proposed rent increase based on the income provided within the application.
Additionally, many landlords fear they will not be able to fill the vacancies caused by a rent increase if tenants were to move out. The simplest solution to this is to make sure that the rent you charge stays on par with the local area. If you rent a unit for $750, and similar properties are going for $500, you may find trouble filling the spot. The best way to avoid high turnover and vacancies is to pay attention to market factors and keep your rent within the range of the area you are in.
Another drawback associated with raising the rent can come in the form of legal consequences, so it is crucial to pay attention to local rules and regulations regarding rent increases. Property managers should be careful to note that it is illegal to raise the rent in order to force a tenant out of a property. For example, landlords are not allowed to raise the rent for reasons that could be deemed as retaliation.
Rent Increase Calculator
When it comes to determining the amount to increase the rent of a given property, start with the existing rent and consider market factors. Look at the rent of similar properties, as well as the local economy. The amount you will be able to increase will depend entirely on the condition of your property in relation to similar units in the area. Rentometer provides great insights into the average rent of a given area and can be used to give you a clearer idea of what range you can charge.
There are also general rules to follow when increasing the rent of a property. A typical rent increase will be between one and five percent. Raising the rent within this range will typically not cost you any tenants, especially if the rent is still in line with the local market. Now, let’s say you recently acquired a property and the old landlord kept rent especially low, and you find yourself wanting to increase rent between five and ten percent. This is the range where tenants may consider moving–particularly if the quality of the property has not improved.
Something else to consider when looking at a rental increase calculator is the average rental increase in the area. If you own a property in an area with high demand and a ten percent increase is average, you may be able to get away with it without losing a large amount of tenants (assuming your property is up to par with the neighborhood). However, this scenario is especially rare, and in most cases you may find a lot of tenant turnover. This does not necessarily mean that you shouldn’t do it, just keep in mind the potential consequences.
Remember, when you raise the rent it often does not matter to your tenants whether or not the original rent was below market value. Therefore, if you want to keep your existing tenants you may want to consider the percentage increase you are hoping to implement before you shock those living in your property.
Raising Rent In 5 Steps
If you’ve reviewed the above information and decide that the time is right for a rent increase, there are some steps you will want to follow to ensure the transition is smooth and your tenants are happy. Here are five steps for a rent increase notice:
Screen your tenants: The first thing you are going to want to do, particularly if you inherited some tenants when you bought the property, is review their applications and lease agreements. By getting a better idea of tenants’ income and rental applications, you can assess how much you can increase the rent. You may also want to review the past landlord’s comments on any old tenants in order to get a better idea who has had trouble making rent in the past.
Determine the actual rent increase: After you decide you are increasing the rent, refer to the above calculator (as well as your tenant information) to determine the correct increase for maximizing your revenue while decreasing your tenant turnover. By conducting thorough market research, you can help make sure implementing a rent increase matches up with your bottom line as an investor.
Reach out to your tenants: This should be done before you go about approaching your tenants for a rent increase. What do I mean by reaching out? Make an effort to get to know who your tenants are and what they do. Be responsive to any tenant communications and attempt to make yourself available. This will help build a sense of trust with your renters, and set up the framework for a positive relationship as a property manager. Moving forward, this can help renters be more receptive to a rent increase
Provide a written notice of rent increase: This is the most important step for investors seeking to raise the rent. It is required to provide a written increase rent notice, so be sure that you do so. Pay attention to the timeframe as well, most states require that property managers let tenants know 30 days before the start of the proposed rent increase. This can vary for commercial leases or rent increases above a certain percentage. Always stay up to date on local regulations in your area to make sure that any notice to increase rent is in compliance with local laws.
Put together a new lease agreement: After you receive responses from your tenants, you will want to put together new lease agreements stating the terms. This will help you establish a safe legal framework as a property owner, while also allowing your tenants to stay up to date on any changes you want to make to the existing lease agreements.
Sample Rent Increase Letter
When all is said and done, you may find yourself struggling to come up with a rent increase letter, and that’s perfectly okay. The key to a notice of rent increase is to be straightforward and direct, and to do so in written form. This will help ensure you are able to communicate the new rental terms in their entirety––all while following local regulations. Additionally, you will want to make sure that your tenants fully understand the situation at hand. The best way to accomplish each of these tasks is to be as clear and direct in your letter as possible. Below is a sample rent increase letter:
This written notice is to inform you that on Date Of Rent Increase, the monthly rent for the unit in which you currently reside, Insert Unit Number, will be increasing to Insert New Monthly Rent per month. The rental payment is due on or before the 1st of every month.
If you would like to continue your tenancy at Insert Property Address, the new monthly payment of Insert New Monthly Rent will be required. Please be aware that the original terms of your lease agreement will remain in effect.
We ask that you sign the notice below, which serves to indicate your agreement and continued tenancy or your disagreement and subsequent termination of tenancy.
Thank you for your cooperation. We appreciate your continued tenancy.
I agree to the new monthly rent amount of Insert Monthly Rent starting on Insert Date Of Rent Increase, and will continue my tenancy per our original lease agreement.
I do not agree to the new monthly rent of Insert Monthly Rent starting on Insert Date Of Rent Increase, and will not continue my tenancy. I will vacate the premises by Insert Move Out Date, per the terms of our original rental agreement.
For property owners considering a rent increase, be careful to consider the area the property is located, the existing tenants, and the current rental agreements. In doing so, you can ensure that any rent increase you choose to implement will be in accordance with the local real estate market and will bring you increased revenue, as opposed to high tenant turnover or vacancies. Delivering a rent increase notice may be intimidating; however, the process could not be more clear cut. If you are raising the rent in accordance with market values and local regulations you can be sure that the rent increase is implemented fairly and correctly.
What are your best tips for writing a notice of rent increase letter? Leave a comment below with some advice for your fellow investors.