Raising your rental fee or any price increase, for that matter, is always a tough balancing act. It’s similar to walking on a tightrope. At the end of the day, however, keep in mind that you’re in business, meaning that you’re in it to make money – all the more if this is your main source of income. So, while it’s good to be kind to your tenant, be fair to yourself too. Here are five pointers on how to raise the rent and how to talking to your tenant about it.
1. When to Start the Conversation
Factors that determine your rental fee, especially those you don’t control, should be a preliminary sign. Simply said, when the price of these factors go up and you choose not to raise your rent, this means less revenue and profit – or maybe none at all – on your end.
Some of these pricing factors that you don’t have control of include:
- Property taxes
- Homeowners Association dues
- Mortgage Payments
- Landlord insurance
- Property management fees
Meanwhile, though you have control over these financial factors, expect them to change over time:
- Pest Control
- Lawn Care
- Appliance and Utility Repairs
- Rental Vacancies
It’s also advisable to begin conversations 1-2 months before the end of the current contract. This way, you’d be able to provide ample time for negotiations, especially if the tenant finds the rent increase to be a huge pain in the pocket.
Timing is likewise a vital factor in informing your tenant of an increase. You may consider having special deals or rates for those moving in May or June – because of high movement – or in off-season months like February, March, and October to encourage move-ins. November and December are not advisable months, as the holidays are expected to churn out everyone’s budgets making rental increases very highly unfavorable during that period.
Moreover, before even talking to your tenant, make sure you know your state’s and even your city’s landlord-tenant laws. It also helps to check on what formal notices are and how they are to be presented to your tenant.
2. How to Do the Conversation
Raising your tenants’ rent can be as hard as asking for a raise from your boss. In this case, however, you won’t need to get into specifics such as the state of your finances.
You may feel uncomfortable if you’re about to present a rent increase notice to your tenant for the first time. It’s understandable if you’re worried that your tenant might leave or worse, destroy parts of your property as revenge. Fortunately, this can be avoided. After all, raising the rent is just one normal part of being a responsible landlord.
As mentioned in the previous section, about 1 to 2 months would be a good period of notice for tenants. The ideal, however, would be 60 days. If the tenant decides not to renew, that gives you just enough time to market and show your place and eventually avoid having a vacancy.
Begin your rent increase letter by thanking your tenant for being great companions. Point out the positive traits they have, especially if they’ve constantly paid their rent on time and if they’re taking care of the property, etc.
Afterwards, hit the point right away that you need to increase the rent. Though not required, you may explain that this is to be updated with your expenses. To lighten the mood, mention that you did every effort to minimize the rental raise hoping they’d stay with you. Then, state how much the new rent would be and the date of effectivity.
Be aware that you can’t up your rent just because you’re not in favor of a person’s race, religion, or sexual orientation. Neither can you increase the rent simply because your property underwent repairs or as revenge towards a tenant who complained to local officials for violations.
In most states, if a tenant filed a complaint against you before a government agency or has exercised legal right, then you’re barred from increasing rent for a certain period of time, usually from 60 to 180 days. Otherwise, courts would assume it to be a form of “retaliation.” But then, check your respective state laws for rules regarding retaliation.
3. How to Determine New Rent
Local knowledge is key in determining your new rental fees. You may consider increasing rent if there are sites of high foot traffic built near your place. Examples include commercial establishments, schools, places of worship, and public transport stations.
Personal finance writer Amanda Dixon in her blog cites that landlords typically charge between 0.8% and 1.1% of the home’s value. This means that a home valued at $300,000 can have a monthly rental charge of $2,400 to $3,300.
She adds that if your home is worth $100,000 or less, it’s best to charge close to 1% of the value. Meanwhile, if the home is worth over $350,000, you may want to charge lesser than the 0.8% rent rate to entice more buyers.
Study your state’s renting rules as well, as each state has different authorized rate increases.
While you may have all the reasons to back your rent increase, make sure that the actual rates are within the local area’s market prices. Be aware also that tenants are watching for those price ranges since they would be checking these against the new rates you’d be telling them. Going above the range would certainly be unwelcome to tenants.
Landlords often have the leeway to jack up rent to as much as the market can hold. Other than state laws, figuring out the proper rent increase is a balancing act between maximizing income and coming up with a price that your tenants can afford and will make them stay long with you.
4. How Soon and Often Should Rent Be Increased
Property values go up yearly or every certain number of years. While it’s up to you to decide as to how you’ll go about it, an increase in rent is inevitable. That said, it’s suggested that rent raises be done yearly, preferably at minimum rates.
Set expectations in the rental contract early on. It would be prudent to state a 3 to 5 percent increase per year. This would be better rather than a one-time bigtime increase of $200 or more after holding the rental fee for 5 years, which will turn out even worse.
Nonetheless, if you have tenants who you wish to keep because they pay you well on-time, consider waiving the increase should they decide to sign for another year. You can make up the difference, after all, by increasing the rent on new tenants when these previous ones finally move out.
If it’s a fixed-term lease that you have, you may include a new lease with your letter or attach it to your email. Ask your tenant to examine the new lease, have it signed, and then sent back to you. If you’ve made any changes, including rent increase, make sure they’re highlighted.
Note that if your lease is on a monthly basis, there’s no need for the tenant to sign every so often because of automatic renewal.
5. Developing A Relationship
It’s one thing for the landlord and the tenant to be transactional, but it’s another and more meaningful one to have a healthy relationship.
That relationship begins when you present your property to the prospective tenant, whether on-site or online. Remember, first impressions last. Show everything important there is to know and be as honest as possible. Limited photos may mean that you’re trying to hide something. Consider using easy online software that allows you to come up with great listings and provides for online application for prospective tenants.
Being personal also helps build relationships, so it’s a must to know your tenant on a first-name basis. After all, the tenant is a person just like us, the landlord. This sets the tone of your landlord-tenant relationship once you’ve established it. Not only did you extend your goodwill, but you also gently reminded your tenant of his or her responsibilities, especially for missing or damaged items. It makes the tenant take care of the property more than you do.
Don’t just end there. Send birthday wishes and other greetings to instill that personal touch. A simple note would do, but delivering the message is ultimately up to you.
Make sure you and your tenant have time for maintenance on your property every month. Remind your tenant in particular to change the air filters or insulators over the water during winter. It also would be nice if the property is kept as neat as possible.