Raising rent at your investment properties when a tenant’s lease is coming to an end is a standard part of being a landlord. You’re simply keeping pace with the market and adjusting for rising costs over time.
Of course, your first step is to familiarize yourself with state and local laws to ensure that you’re allowed to raise rent (is there rent control?), that you know how much you’re permitted to raise the rent if there’s a limit, and that you know how much advance notice you must provide your tenant (it’s usually 30 or 60 days, but sometimes more).
But just because a lease is ending, that doesn’t necessarily mean you should increase the rent. While it’s often a good idea, and tenants typically expect it, give it some consideration. Here are a few thoughts about raising rent at your investment properties.
Should You Increase the Rent?
It’s only natural to want to bring in a little more money every month. And assuming you properly screened your current tenant and accepted one who’s well qualified, you should be confident they can afford a slight increase.
We should say something about compassion though, given the times. As of this writing, we are still in a pandemic and an associated serious economic downturn. Many people have suffered a loss of income and an increase in debt over the past year. If you know a tenant has been struggling in these trying times, consider forgoing an increase in their rent for the time being. Or, if you feel you must increase the rent, perhaps you can raise it less than you originally intended.
This caveat aside, there’s one simple way to tell whether you should raise your rent: Look at the rates at comparable properties in the same area. If your current rate is lower, you can certainly raise the rent. In particular, if you see similar rentals with fewer amenities or advantages charging higher rent, you’re likely below the market rate.
If you decide not to raise the rent, perhaps you can find other ways to generate more income from your investment properties.
How Should You Let a Tenant Know About a Rent Increase?
Again, there are usually local laws mandating a minimum amount of advanced notice a landlord must give a tenant about a rent hike. It should be in the lease agreement too, just as it’s specified that the tenant must give you a certain minimum amount of notice about their intent to re-sign or vacate the property. Generally, a landlord must provide at least 30 or 60 days’ notice about a rent increase, and in some places it’s even 90 days.
Provide the tenant notice about the rent increase in writing. The notice should be professional. Thank the tenant for the time they’ve spent with you, and express your wishes that they continue to reside in your property. Remind them when their lease will be ending, and that they must provide you with notice about their intent to re-sign or move out. Inform them of how much the rent will increase if they re-sign, and specify the new total monthly amount.
Also, while most tenants expect rent increases from lease to lease, it’s best to give them a heads up about the possibility when they first sign with you. Let them know that rent increases are always possible at re-signing if you need to adjust to keep pace with market rates.
How Much Should You Raise the Rent?
Let the prevailing market rates be your guide. This is the simplest way to arrive at a reasonable amount. But also consider the tenant, and how happy you are with them. If they always make payments on time, are financially stable and responsible, and take great care of the property, there’s definitely value in that; be wary about pushing them out with too big an increase.
Most tenants won’t decide not to re-sign over an increase under $100. Of course, this is a generalization. But the prospect of the hassle and cost of finding a new home and moving often outweighs a relatively small increase in rent.
Also consider lost income if the current tenant does decide to move out. Let’s say they pay $1,400 per month. You notify them that the rent will increase by $100 upon re-signing, but they tell you they’ll be moving out. That increase is worth an additional $1,200 per year. But, if you lose a month’s rent turning over the property, you’ve already eliminated more than that entire gain for the year.
Offering Options when Raising Rent at Your Investment Properties
One thing worth considering is giving your current tenant a few options as to how much their rent increases. Consumers appreciate choices and feeling like they have some control over how much they spend. You can tie the amount of increase into the length of the lease.
For example, offer the tenant a 2-year, 1-year, 6-month, or month-to-month lease at resigning. The shorter the lease, the more your risk, so the greater the rent increase should be. That hypothetical tenant currently paying $1,400 per month could be offered:
- A 2-year lease with a $35 increase to $1,435 per month
- A 1-year lease with a $50 increase to $1,450 per month
- A 6-month lease with a $75 increase to $1,475 per month
- A month-to-month lease with a $100 increase to $1,500 per month
This can be a great way to keep a tenant you’re happy with while making a rent hike appealing. The relatively small increase and the extended security and predictability of the 2-year option are all positives to most tenants. Keep in mind, though, that you may lock yourself into a rate for two years that’s not much more than you’re currently getting.
