This won’t be the first or last time you’ll read this next line from us, but it’s an important one for landlords to never lose sight of – a rental property is first and foremost a business.
And just like any other business, your main objective should be to responsibly maximize profits.
There are several factors that go into a rental operation’s profitability including maintaining properties and keeping expenses low, but the most important one by far is the revenue generated from monthly rent payments.
When setting the appropriate rent amount, it’s important to take into account factors such as comparable properties and the unique features of your property.
But what do you do when you find out that your rent is too low, while you have tenants under a signed lease? When it comes to raising rent, you want to strike a balance between maximizing monthly rent and minimizing vacancies.
The way you go about raising the rent is just as important as the increase itself, and there are several things to keep in mind when doing so. In this article, we will go over everything you need to know about raising rent.
Current vs. New Tenants
The first thing you should probably figure out is whether or not you want your current tenants to stay on. This will play an important role in how much you can increase rent by.
Raising the rent by too much could mean that your current renters will choose to leave and that you will be left with a vacancy to fill.
If you don’t care about retaining your current renters, this shouldn’t be a factor, and you should raise the rent by as much as you believe you can while filling the vacancy quickly.
Assuming you are happy with your current renters and don’t want to go looking for new ones, you should focus on a reasonable increase, support it with valid reasons, and deliver the message to them in an appropriate way.
It’s good practice to weigh out your options and run the numbers to figure out your course of action based on each different scenario.
Delivering the Message
Telling your renters that you would like to raise their rent is probably one of the most uncomfortable conversations you could have with them. It’s important to keep in mind how and when to do this so that you don’t catch your renters off guard and be left with a vacancy on your hands.
How to Deliver the Message
Unless it’s clearly stipulated in the lease agreement, we recommend first broaching the topic with your tenants over the phone. Doing so will give you a chance to explain why you are going to raise the rent, and also to express that you would like them to stay on (assuming that is the case).
It’s a good idea to then follow up with an email or written letter, to avoid confusion and keep an accurate record for everyone’s benefit. While you are not obligated to explain yourself to your tenant, doing so will surely help them understand where you’re coming from and improve the chance of them agreeing to the increased rent.
Showing your tenants comparable properties that are renting for more money in the area is a good example of solid reasoning that is hard to argue with.
When to Deliver the Message
This depends on the length of your lease, but the key here is to give your renters enough time to think it through and to find alternatives if you can’t reach an agreement.
If you signed a standard 12 month lease, giving your tenant a heads up of at least 60 days in advance would be appropriate. For a month to month tenancy, try telling your renters no less than 15 days prior to lease expiration.
Giving your tenants enough of a notice is not only the right thing to do, it’s also the smart thing to do for your own sake. Getting an early answer will give you enough time to plan for a potential vacancy.
When am I Allowed to Raise the Rent?
Legally, you are only allowed to raise the rent (beyond what is stipulated in the rental lease agreement) at the end of the lease term.
How Much Should I Raise the Rent By?
To answer this question, start by figuring out the market price for your rental. If your current rent is at or above the market price, and there is no clear trend of rising rates in your area, it will be very difficult for you to raise the rent without risking a prolonged vacancy.
If however, your rent is clearly under market, you should try to bring it up to its true market rate as soon as you can.
For example, if you are currently getting $900 for a one-bedroom in an area where most similar one-bedrooms rent for $1200, there is plenty of room to go up without a significant vacancy risk.
Assuming your rent is slightly below the market price and you still want to raise it, you should probably start a conversation with your renters to see how much you can raise the rent by without losing them. In this case, even one month of vacancy probably won’t be worth raising the rent, so you should avoid it if at all possible.
We recommend you keep your finger on the pulse when it comes to market prices, and periodically refreshing your analysis of the market rate for your properties.
What About Rent Control?
As always, you should refer to your state’s rental laws to make sure that everything you are doing when raising rents is by the book.
Rent-controlled properties are ones where local municipalities place legal limits on the extent of rent increases that landlords can impose.
This is done to protect low-income renters in certain areas. If you own a rent-controlled property we highly recommend you speak to a local attorney before planning on any rent increase.
Collect Rent Online
Regardless of the rent amount, landlords who collect rent online are better positioned for getting the most out of their rentals and maximizing profits.