Managing a rental property costs money. You need to pay for the costs of maintenance and property taxes, and you also incur expenses for trash, landscaping, and maybe even utilities.
All these costs go up over time. Property values increase, and taxes along with them. The refrigerator that cost $700 to replace last year costs $775 this year. And with rising fuel costs, your landscaper and trash service will be charging more.
To compensate for rising costs, you’ll need to raise your rent from year to year. You’re probably asking, “how much should I increase rent every year” and what are the legal limitations? Let’s take a closer look!
What Is The Average Rent Increase Per Year?
The average rent increase will depend mainly on where your rental property is located. For one thing, many states and municipalities place legal limits on rent increases in any given year. An increase that’s perfectly legal in one city could subject you to fines in another city. Make sure you know your local laws!
That said, most landlords plan an increase of between 5% and 10% next year. That’s higher than most years, but it accounts for this year’s steep inflation.
Regardless, there will be other factors to consider. If there’s a lot of demand in your area, you can raise your rent higher. If your local market has a glut of rental housing, a more modest increase is in order. You may be able to raise a seasonal rental when it’s in season, while even a small off-season increase could drive away tenants. It all depends on your property.
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When Can A Landlord Raise Rent?
A landlord can raise the rent whenever the lease is renewed; if the rental is month-to-month, they may raise it at any time. And when a new tenant moves in, you’re under no obligation to offer them the same lease terms as the previous tenant.
That said, there are further limitations in some cases. For example, the government limits how much you can increase the rent for Section 8 housing. And New York City’s rent control laws are a world unto themselves.
When Can A Landlord Not Raise Rent?
Landlords can’t function without making periodic rent increases. And in most cases, they have broad discretion to do so. That said, there are certain scenarios where it may be illegal to raise your rent. These scenarios can include the following:
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The lease has a fixed term and has not yet expired.
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The lease states that the rent will not increase upon renewal.
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You never presented the tenant with a rent increase notice.
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The property is subject to state or local rent control laws.
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The rent increase was retaliatory.
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The rent increase was due to racial discrimination or other forms of discrimination covered by the Fair Housing Act.
How Much Should I Increase Rent Every Year?
Assuming you’re legally allowed to increase your rent, the next step is figuring out how much to raise it by. Don’t raise it enough, and you’ll be losing money. Raise it too much, and your tenants will be angry. Here’s a three-step process for determining the right price.
1. Calculate Your Operating Expenses
Before you know how much to charge for rent, you need to know how much you’re spending on the rental property. Review your records, and tally up what you’ve paid over the past year. Don’t go with a monthly record because many expenses vary from month to month. Calculating the whole year’s expenses will give you a clearer picture of how much you’re really spending.
Next, divide that number by 12 to determine a monthly average. That’s the bare minimum you need to collect in rent – just to break even. Beyond that, you’ll be earning a profit!
2. Stay Informed On Recent Changes To Rent Prices
The rental market is constantly changing, and prices can change drastically in a hurry. Before you decide on an increase, it’s wise to check market trends. More specifically, it’s worth looking at the impact of these changes on tenants.
Are renters staying in their apartments as prices go up? Or are they opting to move into more affordable housing? If the market favors higher prices, you can afford to make a steeper increase. But if tenants opt for lower rent, you may want to limit how much you increase your rates.
3. Research Rental Comparables
Ultimately, real estate markets are local. If you want a good idea of what you can charge for your property, look at comparable properties in your local area. This doesn’t require any particular amount of skill.
All you have to do is go through local apartment listings and see what people are charging. Make sure to look at neighborhoods similar to yours, with similar amenities in the apartment. The more similar the units are, the better a comparison you’ll get.
Find several comparable units and average out the cost. This won’t give you a perfect number. But it gives you an idea of what tenants will be expecting.
How To Tell Your Tenants About Rent Increases
In most states, the law requires landlords to send a letter to notify their tenants of impending rent increases. Since you’ll be raising the rent at the end of their lease, you should probably send them a letter anyway. And it’s easy to combine the two letters into one.
Ask your tenant if they intend to move or renew their lease. Let them know that if they opt to renew, they’ll be paying however much per month going forward. For example, if the current rent is $900 and you’re raising it to $950, state this explicitly.
Make sure to send this letter well before the end of the lease; ninety days in advance is best practice. That way, your tenants will have plenty of time to decide.
If you have a good relationship with your tenants, raising the rent can be awkward. This is someone you like, and now you’re asking them to pay more every month.
In that case, there’s nothing wrong with explaining to your tenants why you’re raising the rent. Let them know that your increase is in line with market standards, and explain that your expenses have gone up since last year. This can at least help to soften the blow.
Negotiating With Tenants On Rent Increases
It’s up to you whether or not you want to negotiate on rent price. It’s your property, and you’re not obligated to rent it at any price. However, tenants will sometimes want to negotiate. In that case, it’s not always a bad idea to see if you can come to an agreement. This is particularly true if they’re a good tenant and you don’t want to lose them.
That said, you may decide to stand firm on the price. In that case, make sure to notify the tenant in writing that they must either agree to the new price or vacate the property at the end of the lease.
Summary
Raising rent is never an easy decision. But by following this advice, you can compensate for rising costs without stepping over any legal lines or losing good tenants. Deciding how much you should increase rent every year depends on several factors like your operating expenses and local comps. Hopefully, you’ve also learned a thing or two about how to keep your tenants happy.
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