Over the last 10 years, rental rates in the US have increased by 31%. That’s an average of about 3% per year.
This shouldn’t be surprising. Landlords must raise rents to keep up with rising expenses and to remain competitive with market rates.
But they also want to experience as little turnover as possible, because vacancies are costly. It’s a delicate balance.
In this article, we’ll discuss when you should raise rent and when you probably shouldn’t, along with some tips on how to go about it.
Real estate is a business. When you’re a property owner, you have to make decisions based on what will make a profit. Otherwise, you’ll lose money and eventually your livelihood.
So here are four times when you should consider increasing rent:
As the property owner, you’re responsible for covering all kinds of fees and expenses, including property taxes, utility bills, HOA fees, home insurance premiums, property management fees, and maintenance and repair costs.
As these increase from year to year, your profit margins will shrink. That is, unless you increase your rental fees.
To maintain a positive cash flow and stay profitable, you’ll have to adjust the rent to match the increased expenses you incur.
Of course, market rent rates rise over time. Many phenomena contribute to this, from general inflation to local housing booms.
You’ll want to set a competitive price for renting your units in order to attract quality tenants. If you charge too little, you’ll risk getting renters who won’t respect your property.
To determine the fair market rate, talk to property managers who handle similar facilities in the area. Or you can enter your property’s address in an online tool like Rentometer.
An expired lease presents a great opportunity to raise the rent to meet market rates. After a lease is up, it typically defaults to a month-to-month agreement, and you can increase the rent any time and as frequently as you like, so long as you provide sufficient notice and follow local regulations.
Another great time to raise the rent is following a renovation. Upgrades increase the value of your property by making it nicer.
You might update the bathroom or the kitchen with new appliances; or put in new flooring or light fixtures. Every improvement increases the property’s value and serves to justify an increase in rent.
There are certain times when you should probably not raise the rent.
Most leases run for a year, during which time you’re obligated to stay with the rent amount specified in the contract. Trying to raise the rent during the lease term is illegal, so you’ll have to wait until it’s concluded.
Obviously, you must always follow the laws. Local regulations might prohibit rent increases for properties built during certain years and in certain areas. This is known as rent control.
A famous example of rent control involved an actress named Patricia O’Grady, who managed to live in her New York City apartment until her death in 2018 for only $28 per month. Nobody would wish to be in that landlord’s situation, but whoever it was had to follow the law.
At other times, local regulations control only the rate at which you can increase the rent. This is called rent stabilization. The allowed rate of rental increases is often closely tied to the consumer price index (CPI).
In any case, you should never violate the law or you could get into a lot of legal trouble and have to pay significant fines.
Every time you raise the rent you run the risk that your tenant may decide to move instead of paying the new rate. If you’re worried about losing a good tenant who treats the property well and has always paid on time in the past, keeping the rent at the same level might be worth it.
Otherwise, you’ll risk incurring a costly vacancy and you possibly having to fill it with a lower-quality tenant. Good tenants can be hard to come by, so it’s wise to do what you can to keep them.
The Fair Housing Act prohibits landlords from discriminating against tenants among any of the protected classes: race, color, national origin, religion, sex, familial status, and disability. So you must be careful not to raise the rent for some tenants and not others.
You also shouldn’t raise rent in an effort to force tenants to move out or to retaliate against them for anything. If you do, that could get you into some serious legal trouble.
Now that we’ve covered when to raise the rent and when not to, you should be better prepared to make the right decisions. Should you choose to raise the rent, here are some tips:
At the end of the day, raising the rent is an essential task in the duties of a landlord. But we know it can be an uncomfortable one.
Fortunately, Green Residential has years of experience with leasing properties. Our professional team of property managers know how to raise rent smoothly, with minimal hassle.
If you’d like to take advantage of our well-established property management system, feel free to reach out today for a free rental analysis.
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