Raising rent can be great for you as a landlord, but it can be stressful and slightly annoying for tenants stuck with a very strict budget. You need to think about the variables when it comes to increasing the rent.
Do you have a great relationship with your tenants, one you shouldn’t be risking for a few extra dollars? Are you expecting the increase to cause issues? Both are things you will need to give some thought to when you are planning to increase the rent.
In this article we will look at when it is appropriate to increase the rent, how you should go about it and what problems you may encounter when doing so. We will also put together a template letter for you to send to your tenants informing them of your intention to increase their rent.
When to Increase Rent?
Deciding when to increase the rent can be difficult. But the difference between putting some thought into it and choosing an appropriate time to do so and simply calling the tenants and informing them that you are increasing their rent can be huge.
When handled professionally and in line with the current market you should experience very little push back from your tenants. Problems tend to occur when the increase comes out of the blue, is handled poorly or is of such an amount that it seems out of sync with the current market.
End of Lease
Increasing the rent at the end of a lease period makes the most sense and is often the easiest time to have the discussion. You should look to increase your rent inline with the market on a yearly basis where possible and any contracts you have with the tenants should make allowances for this.
Aim to speak with the tenants at length about your plans and let them know as soon as you can that you intend to increase their rent. My advice would be to broach the topic roughly two months before the lease expires. This gives all parties enough time to think the increase through and come to an agreement, where possible.
It is likely that your tenants will aim to negotiate so having a specific amount noted in the contract will save you a lot of hassle. Be conscious that should the market have changed for the worse since the time you negotiated the initial lease a tenant will try to negotiate this amount with you.
In this case you would need to decide whether or not you value your relationship with that tenant enough to lower your expected increase. By giving yourself a two month notice period you are giving yourself enough time to get any potential headaches dealt with, after which you can either extend the lease at a higher rate or remarket the property for new tenants.
This isn’t always a valid reason to increase somebody’s rent, but may be a point at which you can negotiate an increase with a tenant. From time to time you will find that tenants wish to move in additional occupants. Usually a partner or an additional friend to help cover the rental costs.
If you have provisions in your lease to do so at this point you may be able to ask for an increase in rent to cover the potential additional wear and tear you will suffer at the hands of the additional tenant.
You will not always be able to do this, but if you are not keen on having any extra tenants this may be something that the tenants can offer you to soften the blow of having to accept something you are not keen on.
Confirming the rental amount for any subsequent leases in the current lease is common practice and should take the majority of the hassle out of a rent increase provided the market doesn’t reduce drastically in the first period of the tenancy.
Play it safe by adding an RPI increase into the agreement, meaning that the rent you are achieving is growing inline with current economic conditions. Note in the agreement a time frame from which you can take the RPI point and add it to the current rental amount.
This tends to be the fairest way to calculate any potential increase and is rarely rejected by tenants. The bigger issues come when the market over or under performs you expectations. Should the value of the rent drop, tenants will want to renegotiate and threaten to leave if you don’t agree and should the rent increase beyond your expectations you may be forced to stick to the lower amount you agreed to in the contract.
How to Increase
There are a number of fairly standardized ways that you should aim to increase the rent. You will likely have to meet notice periods and confirm to ways of informing the tenants that are set out in the contract you have with them.
Make the process of increasing the rent smoother by doing as your contract instructs you too. This will give the tenants less negotiation room as you are meeting your obligations.
Inline With The Market
Using market guidance and advice from your broker on current rental values should help you get your point across to tenants unsure of the level of increase you are requesting.
If you do your research and get an idea of the current value of your property this will give you far greater power to get what you want. If you have spoken with brokers and used online property portals to gauge the market it will be difficult for your tenants to disagree with you.
Make your point to the tenants and give them the opportunity to look through the market themselves so that they understand your position. If you are being fair and reasonable with them I fail to see how they would be able to justify rejecting any increase that is based upon market evidence.
Your strongest argument in this instance would be that they would have to pay that amount for your property if it were on the open market anyway. They can remain in a property they know and like or can vacate and find a similar property for which they will have to pay the same rent as you are asking.
Should you choose to not deal with any rental increases, simply instruct a Property Manager who can handle the process for you. Property Managers will understand the complexities of handling a rent increase negotiation and will be unconcerned by having to deal with potentially upset tenants.
A good Property Manager should have in place notice periods, template letters and back up phone call dates to ensure the smooth running of any rental increase. You should be able to inform a PM of the increase you are looking to achieve and have them handle the rest.
Give Sufficient Notice
As discussed earlier, by giving your tenants significant notice of your plans you are allowing everybody time to get the increase agreed and put into writing via a second lease or addendum to the first.
I would always aim to give two months notice as a minimum, so when you are dealing with a twelve month agreement you or your PM should be reaching out to your tenants to discuss the rent increase at month ten. This gives your tenants enough time to understand the process and respond with any queries.
It also gives you the time to negotiate with the tenants if needed and the time to remarket the property should your tenants reject your plan to increase the rent. Remember, giving appropriate notice is key to a successful rent increase.
Rent Increase Letter
Always put your plans in writing in the form of a letter that can either be mailed or emailed to your tenants. A letter is the most professional way to get your point across and can be dated so that you can show the length of notice you are giving your tenants.
Most contracts will note that increases must at least be finalized in writing, so should you or your Property Manager be negotiating over the phone or in person with tenants putting the finalized increase in writing ensures that all parties know what is happening.
Potential Problems With Rent Increase
Some tenants may be on a strict budget and some my not agree with your rental valuation. Whatever their reasons at some point in your career as a landlord you will experience problems related to increasing your tenant’s rent.
Asking questions and getting to the bottom of why your tenants disagree with you gives you the power to be able to negotiate with them and maybe agree a slightly lower increase if necessary.
If a tenant can’t afford the increase, have a think about how much you value an existing relationship with a reliable tenant. If they are great tenants maybe you can agree to forgo this year’s increase with the plan of a larger increase the following year or you could propose a lower increase. This shows that you are giving them something and still gets you an increase of some kind.
If someone disagrees with your valuation, use brokers and property portals as evidence to show why you value the rent the way you do. A rejection shouldn’t be viewed as a flat out no and should be used as grounds to open up a dialogue so that you can all come to an agreement.
If the tenants really won’t budge then you must consider your options and either back down or allow them to leave and find new tenants, If you are being reasonable and are only looking for an increase that mirrors the current market rates your broker should be able to get you the amount you are requesting from new tenants. Just make sure you inform your outgoing tenants early enough so that you have the time to successfully remarket the property.
Be fair and give your tenants (and yourself) plenty of time to come to an agreement on the amount you are increasing and you should have a smooth experience. Even if your tenants do push back if you have a well thought out logical reason for increasing the rent and have looked to increase by a reasonable amount and are not just be greedy you should find that the whole experience is a successful one.
Below, I have laid out a template for a letter that you can use to inform your tenants of your intention to increase the rent, use this template to confirm your point in writing, it also acts a proof of notice as it is dated, in case of any disagreements.
[Tenant’s Name] [Tenant’s Address] [Date] Re. Rent Increase Dear [Tenant’s Name], The rental lease dated [add date the agreement was signed] expires on [date of lease expiration] as such please be advised that after carrying out market comparables and seeking advice from my broker I intend to increase your current rent from [add current rent] to [add proposed rent]. This represents an increase of [add percentage] and falls inline with the current market conditions in [add location of property]. Please be advised that the increase will become effective from [add start of new rental period]. Should you wish to renew the lease of [add property address] please confirm this in writing to me by [add date]. I will then organise for an addendum to the initial agreement to be signed by you and I. Should you not wish to renew the lease, please inform me as soon as possible and in accordance with your lease. Any queries please don’t hesitate to contact me. [Landlord’s Signature] [Landlord’s Name]