Owning a rental property comes with ongoing expenses like maintenance, property taxes, trash removal, landscaping, and possibly utilities.
Over time, these costs rise. Property values and taxes increase, the $700 fridge you replaced last year now costs $775, and higher fuel prices mean your landscaper and trash service charge more.
An annual rent increase is necessary to keep up with these growing expenses. But how much should you increase rent each year? And what legal limits should you consider?
Average Annual Rent Increase Explained
The average rent increase depends heavily on your rental property’s location. Many states and cities have legal limits on how much rent can go up each year. What’s legal in one area could lead to fines in another, so always check your local laws!
Typically, landlords plan for a 5% to 10% rent increase next year. This is higher than usual due to recent inflation spikes.
However, other factors come into play. If demand in your area is high, you might be able to raise rent more. If there’s an oversupply of rentals, a smaller increase may be smarter. For seasonal rentals, you can increase rent during peak season, but raising it off-season might scare off tenants. Ultimately, it depends on your local market and property.
How Frequently Can Rent Be Raised?
Landlords can raise rent when a lease is renewed. For month-to-month rentals, they can increase it at any time, as long as they provide proper notice. When a new tenant moves in, landlords aren’t required to offer the same lease terms as the previous tenant.
However, some restrictions apply. For example, rent increases for Section 8 housing are limited by government rules. In cities like New York with rent control laws, there are strict regulations on how much rent can go up. Always check your local laws before raising rent.
When is rent increase not allowed?
Landlords typically have the ability to raise rent periodically, but there are situations where it may be illegal to do so. These include:
- The lease has a fixed term and hasn’t expired yet.
- The lease specifies that rent won’t increase upon renewal.
- You didn’t provide the tenant with proper notice of the rent increase.
- The property is under state or local rent control laws.
- The rent increase is retaliatory.
- The rent increase is based on racial discrimination or other forms of discrimination protected by the Fair Housing Act.
What’s a Reasonable Yearly Rent Increase?
When you’re legally allowed to raise rent, the next step is figuring out how much to increase it. Raise it too little, and you lose money. Raise it too much, and you risk upsetting your tenants. Here’s a simple three-step guide to setting the right amount.
1. Calculate Your Expenses
Start by reviewing your yearly operating costs for the rental property. Add up expenses like maintenance, taxes, and utilities to see how much you’ve spent over the past year. Avoid relying on monthly totals since expenses can vary widely.
Once you have the total, divide it by 12 to find your monthly average. This figure represents the minimum rent you need to charge just to break even. Anything above that is profit!
2. Check Market Trends
The rental market can shift quickly, so it’s important to stay updated on current trends. Are tenants willing to pay higher rents, or are they moving to more affordable options?
If demand for rentals is high in your area, you might consider a larger increase. But if renters are being priced out, keeping the increase modest can help you avoid losing tenants.
3. Research Comparable Rentals
Real estate markets vary by location, so research similar rentals in your area to gauge a fair price. Look at properties with comparable features, amenities, and locations.
Check online listings for rental rates and find several similar units. Then, calculate the average price. While it won’t give you an exact number, it provides a solid benchmark for setting your rent.
By following these steps, you can set a fair rent increase that balances your expenses, market trends, and tenant expectations.
Informing Tenants About Rent Increase
Most states require landlords to notify tenants about rent increases through a formal letter. Even if not legally required, sending a letter is a good practice, especially if you raise the rent when their lease ends. You can combine this with a renewal notice.
In your letter, ask tenants if they plan to renew or move out. Clearly state the new rent amount if they choose to stay. For example, if the current rent is $900 and it’s increasing to $950, mention the new rate explicitly.
Send this letter well in advance—90 days before the lease ends is ideal. This gives tenants plenty of time to consider their options.
If you have a friendly relationship with your tenants, raising the rent can feel uncomfortable. In these cases, it’s helpful to explain the reason for the increase. Let them know it aligns with market trends and reflects rising expenses like maintenance and taxes. Providing context can make the situation easier to understand and accept.
Talking to Tenants About Rent Increase
It’s your decision whether to negotiate rent. As the property owner, you’re not obligated to accept a lower price. However, if a tenant asks to negotiate, it’s worth considering—especially if they’re reliable and you’d prefer to keep them.
If you choose to stick with your set price, be clear and professional. Send a written notice informing the tenant they must either agree to the new rate or vacate the property at the end of the lease.
Wrap-up
Raising rent can be a tough call, but it’s often necessary to cover rising costs. By following these tips, you can adjust rent fairly while staying within legal limits and keeping good tenants. Factors like your operating expenses and local rental rates play a big role in deciding the right increase. Plus, you now know how to handle the process in a way that keeps your tenants happy.