Increasing monthly rent is an inevitable part of being a real estate investor.
Think about it. If you never increased your rent, you’d never keep up with market value or inflation. The cost of maintaining your unit would outpace your income, and you’d have trouble staying in business.
That said, some landlords have a tough time asking for more rent from their tenants (especially if they don’t have a property manager). But if you do it right, it doesn’t have to be awkward or uncomfortable. In fact, your tenants probably expect their rent to go up moderately from year to year.
The most important part of a rent increase is notifying your tenants in writing and in a timely manner. In addition, there are necessary elements that all rent increase letters should contain.
In this post, we’ll show you when and how you should raise your rent, and how to write a rent increase letter.
When Should You Raise Rent?
According to Nolo, you can’t raise your rent until the end of the lease period, whether it be an annual or month-to-month, and you must give sufficient notice of the rent change. Usually, that’s 30 days before the end of the lease agreement.
There are exceptions. If you include a clause in your rental agreement that allows rent changes before the expiration of the lease, or if your tenant agrees to, say, a small rent increase in exchange for improvements to their apartment, then you can increase the rent before the lease is up.
The National Association of Realtors (NAR), however, recommends raising your rent once a year, every year, rather than sporadically or on an as-needed basis. It makes rent increases more predictable for tenants, which makes it easier for you to determine who will re-sign and who won’t.
Let’s look at an example...
You were renting a home for $1,000 / mo. Other units in the area are renting for around $1,100, so you think your rental property will also command $1,100 / mo. When the time comes to renew a tenant’s lease, you send a rent increase notice telling him you’re increasing the rent; he decides not to renew.
When he moves out, he’s a bit disgruntled about the rent increase, so he does some damage. Thankfully, you have a damage deposit, but he’d been living in the home for five years.
His $1000 deposit doesn’t cover all the damages. You deep-clean and repaint the home, which costs $1,500. You also install new carpets and fixtures, to the tune of $2,000.
The repairs and cleaning take two weeks to complete. You take pictures and advertise the vacant unit. For some reason, it doesn’t generate much interest after being on the market for two weeks at $1,100 / mo. You drop the price to $1,050, and get a renter the next day. She signs the contract and moves in two weeks later.
The expenses will include:
- New carpets and fixtures: $2,000
- Net cost of cleaning and painting: $500 (offset by deposit)
- Lost rent ($1,000/mo x 1.5 months of vacancy): $1,500
- Total cost to turn and re-lease the unit: $4,000
The income will be $50 / mo (the delta in old rent versus new rent).
The time it will take you to break even from all those expenses equals 80 months ($4000/$50).
How Much to Raise It?
How much you raise your rent will depend on local and state laws, the rental market and your own needs.
Before increasing your rent, the first thing to do is to take a look at your state and local rental laws and restrictions.
For example, in New York City laws passed in June 2019 bring back rent control, which limits when and how much a landlord can raise their rent. Earlier in the year, Oregon passed statewide rent control laws that limit rent increases to 7 percent per year, plus the rate of inflation.
Second, the NAR stresses the importance of setting your rent prices according to the rental market in your area. You want to remain competitive without underselling yourself. But you also don’t want to raise your prices exponentially higher than other units in your building or neighborhood.
Resources like Rentometer can actually help you out here. You can look up rent amounts in your area for similar properties to get an idea of what you should be charging.
Finally, you may have other factors that could affect how much you raise your rent. Here are some common circumstances to consider when determining how much to raise rent.
- Cost of Living: Since it’s tied to inflation, you’ll probably be adjusting rent yearly for this anyway. Cost of living is often reflected in salaries in your city or region, so take that into consideration when setting rent prices.
- Tax Increases: If your city votes to increase property taxes, you may need to reflect that in your rent.
- Maintenance: This is a tricky one. If your maintenance costs go up, your knee-jerk reaction may be to reflect that in your rent. But you might want to look at ways to decrease maintenance costs before charging your tenants more.
- Utilities and Other Bills: This is another factor that you should really think about before passing the cost on to tenants. If you can, find ways to cut costs, like installing energy-efficient bulbs, upgrading to smart thermostats, or blowing in more insulation.
- Building Improvements: If you’ve made major improvements to your unit or building, you’ve probably added market value. This is particularly true if you’ve added amenities that new renters are looking for.
- Improvement of Neighborhood: We have all seen it: When new industry moves into a neighborhood, rents go up. If your neighborhood has become more desirable, take that into consideration when you raise rents.
Elements of a Good Rent Increase Letter
According to Nolo, rent increases must be in writing, and in some states, delivered by certified mail.
A good rent increase should be worded in a neutral, professional manner and give only the information necessary to notify your tenant of the rent increase. Adding commentary, emotional wording, or unnecessary information could offend your tenant, or cause a conflict.
There are templates available online you can use to write your own letter. We took a look at several of them. They all included the following:
- The name of the tenant
- The address affected by the rent increase
- The amount of the increase and the new rent price
- The date the new rent goes into effect
Rent increase letters should clearly state when your tenants must give you an answer to your letter and tell you whether they agree to the increase or not.
Include your contact information and encourage your tenants to reach out with questions or comments. It’s important to be available and open for discussions about the rent increase.
Make it clear that your tenants have the right to reject the rent increase and what happens if they do. In most cases, if the rent increase is fair and legal, then tenants must move out of the unit.
Most of the other templated rent increase letters you’ll find on the internet sound like a machine wrote them.
Your tenants are humans, just like you. So make your letter personable.
Nobody is going to be excited to read a rent increase letter, but it can feel like a less annoying process if you clearly explain why you're raising their rent and giving it a personal touch.
Remember, the most expensive cost of rental property investing is when you incur turn costs after a tenant leaves.
Here is a sample rent increase letter you should follow.
Hello <Name of Tenant>,
Hope you’re having a great week. I wanted to reach out to let you know that the rent will be increased by <enter increase amount> to bring it to a total of <enter total amount> on <enter date>. This will be the end of your current lease and the beginning of a new lease.
Please understand that this increase is not a reflection of your tenancy, but of the current rental market. We can further discuss if you have any questions or comments regarding this rent increase. You can reach out to me either by my cell phone at <enter phone number> or by email at <enter email address>.
Please let me know by <enter date> if you accept the new rent and wish to continue your lease at <property address>. If so, we will sign a new lease that reflects the rent increase. If not, then it is expected that you will vacate the unit by the last day of your current lease, which is <enter date>.
Thank you for your consideration and cooperation.
Learning how to write a good rent increase letter is a matter of understanding your state and local laws as well as the essential information all letters should have.
Beyond that, you should understand what an appropriate rent increase looks like for your market and what constitutes a good reason for raising rent.
Finally, make yourself accessible to your tenants. Your letter should convey your openness to questions and comments, and your tenants should feel comfortable reaching out to you.
Including this information in your rent increase letter will make the entire process go more smoothly, without hard feelings.