Increasing the Rent on Your Tenants Without Offending Them (With a Letter Template)
March 28th, 2021
Want to grow your property management company?
Whether you’re a new or experienced landlord or property manager, it’s guaranteed that at some point during the tenure of your real estate management career, you’re going to be required to increase rent.
You may be struggling with the concept because you’re worried about upsetting tenants, negatively affecting a good landlord-tenant relationship or possibly legal ramifications. However, higher expenses in areas such as property tax and maintenance fees may deem it necessary to raise rent from time-to-time.
Before a rental increase is discussed with tenants, there are several aspects to consider. So, if you’re uncertain about how to navigate this delicate issue, you’ve come to the right place. This article has all the necessary details to prepare you to handle this sensitive topic.
What Should You Do Before Increasing The Rent?
Do Your Research
Before increasing rent, it’s recommended that you determine the fair market value of a unit in your neighborhood. You can use several means to do this:
Discussions with other property managers and real estate agents in your area
By utilizing one or more of these methods, you should get a good indication of the value of your property rental.
Understand the Law
Rental law varies depending on your location. Most states legally require you to give tenants a minimum of 30-60 days notice before increasing rent. Additionally, you would need to check to determine if you can legally raise the rent. It’s important to note, that there are instances where you may not be able to increase the rent:
Rent controlled properties have limits on the amount you can increase the rent by, according to your state. As of January 2020, in California, it’s illegal statewide to annually increase rent by over five percent plus the local inflation rate (AB 1482).
If a tenant’s lease hasn’t yet expired, you will have to wait until he/she is starting a new lease agreement to raise the rent.
Crunch Your Numbers
Understanding how to assess your rental property is key to ensuring your rental property investment is profitable. It also helps you to determine if it’s necessary for you to raise rent.
One way to evaluate your unit is to calculate your income, expenses, and available funds. Let’s look at an example of an evaluation for an apartment:
Besides your rental income, there are typically other miscellaneous items such as laundry income, parking fees and vending machines that contribute to your total monthly income. Let’s say your monthly income is approximately $3000.
Some common expenses include, utilities, insurance, taxes, and HOA fees. However, there are other occasional expenses, such as repairs. Even though they don’t occur monthly, it’s still recommended to incorporate these types of expenses into your monthly budget. So let’s estimate expenses at $2500.
This is the amount of money you have remaining after you subtract your monthly expenses from your monthly income. In this situation, you will be left with $500 in available funds. At this point, it’s up to you to decide whether $500 is sufficient. However, if your expenses are greater than your income, you should consider increasing the rent.
Is it Logical to Raise the Rent?
There are several reasons why you may need to raise rent. But keep in mind, if you raise the rent too high, it’s quite possible that some of your tenants would look for more economical alternatives. This can be detrimental as a high tenant turnover can be costly.
On the other hand, delaying a rental increase can cause you to potentially operate at a loss or miss out on optimal market rent rates and profitability. Hence, it’s important to strike a balance so that the agreed rental price is fair to both you and the renters.
Let’s take a look at some logical reasons which would substantiate a rent increase:
Your rental property has fixed costs and variable costs that you have to factor in. Property taxes, property insurance, and association fees are all expenses that may increase over time. These cost increases are justifications for rental rate increases that you need to keep up on.
Additionally, older units often require more frequent repairs and maintenance than more modern properties, specifically on critical items like electrical issues. Landlords typically recoup property maintenance costs via rental increases.
Higher Cost of Living (inflation)
For the last few years, the cost of living has continually increased, inclusive of rental prices. Some landlords include a 2-4% annual increase to cover changes like inflation and higher utility costs. In these situations, tenants are more willing to pay incremental increases as they’ve already entered the lease with this expectation.
Changes in the Real Estate or Rental Market
If there is an increase in demand for housing in your neighborhood, it’s likely the market value will increase too. Once you’ve researched rental prices in your location and calculate the value of your property, you can make an informed decision about raising rent on your units.
Additions and enhancements can help a neighborhood transform from an undesirable environment to a desirable location. In these situations, more people will want to live in the area, which will facilitate an increase in the price of rent.
It’s possible that your reason to increase rent isn’t listed above. For you, it could be due to personal reasons; for example, if you’re unable to afford mortgage payments. If so, it’s not necessary for you to discuss your reason for increasing the rent with tenants. But there are certain things you need to cover.
What Should You Discuss with Tenants?
There’s no doubt that discussing a rental increase is difficult for many landlords. The COVID-19 pandemic has made it even harder, as many people have suffered a loss of income or pay cut. However, discussing certain topics with tenants can assist in appeasing this situation.
It would also be beneficial to display standard practices and expected rental increases on your company website (if you have one) just to have the info available to everyone.
People typically appreciate having alternatives as it removes limitations. For example, you can offer rental package options ranging from long-term leases being the cheapest to short-term leases being the most expensive. These selections are beneficial to both parties. Tenants who are comfortable with their living arrangements would likely gravitate to this package. Meanwhile, long-term leases are more economical for the landlord as it helps to maintain a low tenant turnover.
Payday payment is another option you can offer tenants. This is helpful to tenants because they will not be required to pay rent until they receive their paycheck in hand.
Upgrades and Improvements
Find out what type of upgrades your tenants are interested in getting. It won’t be economical to do all of the ideas your tenants share, but you can do some of them. Use ideas that are reasonable and that will benefit tenants while adding value to your property.
Reasons for Increases
As long as your reason for raising rent isn’t of a personal nature, you should share this with your tenants. Providing an explanation such as an increase in property tax provides tenants with transparency. In this light, they are more likely to be understanding about a rental increase.
How Should You Break the Word to Tenants About A Rental Increase?
Besides knowing what to discuss, there are several skills you should employ in order to successfully handle this discussion.
A tenant is likely to accept a rent increase by someone who listens and understands their perspective.
Communicate Clear and Effective
Communicate with tenants about the rental increase in person or over the phone and via written notice as well.
When discussing the increase with tenants, do so in a clear and professional manner. Be sure to provide tenants with sufficient notice. The amount of notice can be dependent on several factors such as your state’s laws, whether the agreement with your tenant is short or long-term, the proportion of the rental increase, and what the current rental agreement states.
For example, if a landlord plans to increase rent by more than five percent in New York, at least 30 days notice must be given to short-term tenants. Whereas, the landlord must give at least 60 days notice for tenants with a 1-2 year lease term. And 90 days notice for tenants with a 2+ year lease term.
Additionally, it’s important to provide tenants with all the necessary information -- how much more they will be required to pay monthly, the rental increase commencement date, and available payment methods. This will assist in reducing opportunities for ambiguity, negotiation or conflict.
You are required by law to provide tenants with written communication about a rental increase. Your language should be concise and professional. Cite any laws related to the rental increase in order to demonstrate transparency and legal compliance. You can also take this opportunity to remind tenants of your payment policies.
We highly recommend using Certified Mail to send tenants written notification. In this light, you will have evidence that the formal letter was delivered. Certified Mail provides you with an official mail receipt, a USPS tracking number and electronic notification of the date and time of delivery. Ensure that ample time is given for written notification to be delivered to your tenants’ units.
Establish a Good Relationship with Tenants
A good rapport with tenants is imperative for many reasons. You would be perceived as approachable, gain more prospective customers, and tenants would more likely continue to renew their lease.
You can develop a good relationship with tenants by jotting notes on each person and adding it to their individual files. Use these files to enter information that each tenant has shared with you about their interests and even their children's names. Whenever you contact a tenant, use your notes to ask tenants general questions about their lives. If tenants feel as though they’re valued, they would be more accepting of a rental increase.
It’s important to keep in mind however, that a tenant does not have to accept the rental increase. If they refuse to accept it, they will be required to vacate the unit once their lease has expired, and then it's time for you to start focusing on lead generation strategies that will bring you more prospective tenant leads interested in the property.
Bonus Tips For Smooth Rental Increases:
Reserve major upgrades
Execute major upgrades like remodels or replacing a roof when units are vacant. Therefore, you can start afresh with a new rental price for more your new tenants.
Develop a business mindset
Remember that you are invested in the property you manage. That said, it’s important to do what’s necessary to optimize your property’s performance, even if it means raising rents anyway and using the right marketing ideas to attract other tenants.
Hesitant about discussing the upcoming rent increase with tenants? Before contacting tenants, jot down some related notes and read them aloud. Read your notes several times in order to build your confidence to speak to tenants.
'Notice of Rent Increase Letter to Tenant' Template
You can copy/paste the example below to customize and use as a notice of rent increase to deliver to your tenant:
[Date of notice]
[Tenant’s rental unit address]
This letter serves as a notice of rent increase effective [date of rent increase] for tenancy at the above address. Unfortunately, this has become necessary due to higher property tax bills which have prompted the rental increase.
As you’re aware, your Lease Agreement is set to expire on [expiry date]. The rent will be increased to [new rent figure] after that date. Should you wish to continue your tenancy, the new monthly rate is required.
Please sign the attached Notice of Rent Increase and Lease Agreement. If you choose not to continue tenancy, please inform us before the [required date].
Kindly note that all other rental agreement terms remain in effect.
If you have any questions, please contact us. We look forward to your continued tenancy.
In conclusion, raising rent on a tenant is a balancing act which entails demonstrating professionalism skills and connecting with tenants on a humanistic level.
Tenants place value on other aspects of a property rental besides the unit itself. Differentiate yourself by providing a little more than what your local competitors offer. Renters are likely to perceive you favorably if common areas are kept clean, maintenance issues are resolved quickly and external premises are well-maintained. Satisfied tenants are less likely to complain or vacate the premises if the rent goes up a little.