As an owner of a rental property, you make a profit from the rent you charge each month. For one reason or another, there may come a time when you’ll need to raise the rent to continue making profits.
Many first-time landlords, however, resist raising rent due to the fear of losing good tenants who pay their rent on time and facing vacancy. Of course, we understand how challenging raising your tenants’ rent can be – you don’t want to upset them, but you also need the additional cash flow. Nonetheless, rent increase is part of good property management and is key to success in times of inflation.
So, how do successful landlords handle this move smoothly without losing good renters or damaging a good landlord-tenant relationship? Believe it or not, raising rent is an art like the majority of other aspects of property management. Plus, there are a number of things you need to consider before making this move. Keep reading to learn how to raise rent without losing tenants. The following 6 tips are everything first-time landlords need to know and learn.
Tip #1: Check the Market Values
The rent you charge is mostly based on the market rate. So, before you decide to raise the rent, you need to do some market research and find out the rental rate in your neighborhood. This will give you a clear idea of how much other income property owners are charging to decide the amount to raise. Raising rent too high will most certainly cause complaints and you could lose a good tenant who can easily find a more affordable rental in the neighborhood.
First-time landlords can check rental rates in their area by talking to real estate agents or property managers who handle similar rental properties. Another smart thing for property investors to do is to look at real estate rental comps (comparables). If comparable rental properties in your area are renting at a higher rate, this is a good indicator that you can increase your rent as well. This will also prove to tenants that they’re not being scammed and give them a good reason to stay after you raise the rent.
Mashvisor can help you find real estate rental comps. Our Rental Property Calculator allows you to find rental properties in your neighborhood similar to yours along with their data and analytics which include their comparable rental income! You can also download a PDF Excel Sheet Report containing all rental comps you’ve found to start your market research and analysis.
To start looking for and analyzing rental comps in your city and neighborhood of choice, click here!
Tip #2: Understand Legal Limits
First-time landlords need to understand that there are legal concerns to keep in mind when raising rent. For example, there may be a legal limit or ceiling to how much and how often you can increase the rent on your property. Staying in line with the law is crucial for all landlords, and you’ll want to be safe. The worst thing that could happen to an income property owner, besides a tenant leaving, is a tenant filing a lawsuit against you.
Therefore, you should be certain that you understand the local limits and rent control laws before raising rent. Doing so will also help you develop a fair and well-timed strategy. Typically, a good rule of thumb for first-time landlords is to raise tenants’ rent annually by 2 to 4%. In order to not create any issues with your tenants, make sure to state this in the rental agreement! This keeps you competitive with market rents and generates cash flow with little turnover.
Tip #3: Explain Why You’re Raising Rent
Successful landlords with positive cash flow income property don’t raise the rent on a whim – they only do so when there are underlying, solid reasons. In addition, to avoid turnover and vacancy after raising rent, justify your reasons to your renters beforehand. If you don’t, then you can’t really blame them for complaining. So, make sure they understand that this increase isn’t coming out of personal wants, but needs. Here are some of the common reasons why landlords and income property owners raise their rent:
- Changes in the local real estate market
- Increase in property taxes or utility costs
- The need for maintenance, repairs, or remodeling
- Rising mortgage interest rates or insurance premiums
- Property management fees
- Increase in cost-of-living expenses
Tip #4: Give Tenants Plenty of Notice
By law, owners of rental properties are required to send a written notice to tenants regarding the rent increase within 30 – 60 days (even 90 days in some states) before the lease expires. To keep a good landlord-tenant relationship, it’s important to consider your tenant when raising rent. This is especially true if you’re renting out to a good tenant who provides you with a steady source of rental income every month and takes care of your real estate income property.
A written notice will give them the time to be prepared for the rent increase and, thus, they are less likely to complain. If you’re raising rent randomly and without warning, on the other hand, renters are more likely to vacate the property. Moreover, in case they do decide to leave, a 90-day notice makes it likely that they’ll let you know, which gives you time to market your rental property listing and find a new tenant in advance. Of course, you don’t want them to leave, so here are a few tips:
- Take your time to write the rent increase letter and inform them of the news in a friendly manner.
- Explain that you know it is bad news and provide your reasons.
- Tell them that you’d like them to stay and that you hope they continue to rent with you.
- Let them know that you’re available to answer any questions or concerns they may have.
- It’s also recommended to call them to confirm they’ve received the notice.
Tip #5: Build a Better Relationship with Tenants
Successful landlords of rental properties ensure that they have a friendly and warm relationship with their renters long before the times comes for raising rent on the income property. This requires simple tactics like taking a few minutes to ask about their family, kids, jobs, or current events in their lives when you call them. Small gestures like this will enhance your impression – you’ll go from “This landlord just wants checks” to “He/she is a nice person.” This could be just the reason they decide to stay after you raise the rent.
Furthermore, real estate property owners also need to maintain this good landlord-tenant relationship after raising rent. For example, listening to their feedback and answering their questions makes it more likely for tenants to accept the rent increase. Another example is to promise them stability like informing them that there won’t be further increases for another year and offering to renew the lease. Taking some time to teach them about the rental rate in your local market will also assure renters that you’re honest and professional. This creates trust, reduces complaints, and improves your landlord-tenant relationship.
Tip #6: Offer Another Option
It doesn’t have to be “pay more or leave” – you could always offer a third option that puts your tenants’ worries to rest and keeps your income property occupied and generates rental income. For example, first-time landlords can offer renters an extension on the lease. Better yet, offer them a multi-year lease agreement to sign in which rent will rise by 3% instead of one with a 5% increase. This lowers the turnover rate for the long-term, guarantees cash flow, and prevents you from the hassle of finding new tenants every year. After all, long-term tenants are where successful landlords make maximum return on investment in real estate.
The Bottom Line
It’s almost unavoidable for first-time landlords to raise their rent due to various reasons. While no tenant will be happy to pay more, it’s entirely possible to increase rent without losing them to maintain positive cash flow. If you know how to raise the rent in a structured way with tact, professionalism, and friendliness, you can go through it with few complaints and your tenants are far less likely to react badly. What are some tactics you use when raising rent for your properties?
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