How to Handle Rent Increases
Raising the rent is easy if you gave your tenant a month-to-month rental agreement; all it takes in most states is a thirty-day notice. If your tenant doesn't like it, she can find a new apartment and move out at the end of the thirty days.
It takes longer to raise rent and more sensitivity on your part if your tenant has a lease. The lease is a legal contract and both tenant and landlord are locked into what it specifies until it expires.
Why Increase Rent?
One of the primary reasons for raising rent is the increased cost of running your business. In the last few years utility bills have escalated dramatically and most likely will continue to rise. Taxes also go up and you're paying a lot more for maintenance and repairs. These price increases affect you even if you do your own work because the cost of parts and materials has gone up too because of inflation. And when you want to make a capital improvement or replace an appliance that's on its last legs, you may be shocked to find out how much new appliances cost.
So if the rent on your apartment has been stable for quite some time, you'll probably want to raise it just to stay competitive and pay your bills, not to mention make a few extra bucks for your labor. And if you've substantially increased the value of your property and the apartment by making significant improvements, that, too, calls for raising the rent.
When's the Best Time?
With a lease, you can raise rent only once a year — when the lease expires — unless you have a clause in the lease that ties increases to a consumer price index or to your operating expenses. (Ask your rental property owners association or a lawyer for advice on whether your state allows you to add such clauses to the lease, and, if so, how they should be worded.) Or you can raise rent to cover added expenses when a tenant moves out.
How much notice do I need to give the tenant if I decide to raise the rent?
Some states say you must give forty-five to sixty days' notice to raise the rent when your tenant has a month-to-month rental agreement. Check the laws in your state. In areas with rent controls the increase may be linked to the Consumer Price Index (CPI) or an annual percentage rate.
Breaking the News
With a longtime tenant it's best to be honest about why an increase is necessary. Tell your tenant you hate to raise the rent but have to do it because gas and electricity prices have gone way up, your taxes are higher, the improvements you made last summer have to be paid off, and now the city's raising rates for garbage collection or water and sewer service.
If you can, deliver information about rent increases personally. That way you can explain how much thought you put into the process and why, although you hate to do it, you decided it's essential. Stress the fact that you want to provide the best environment you can for tenants. If your tenant seems upset, say that you've already cut costs as much as you can and this is the only option you have left to meet expenses. Your tenant realizes how much bills for heat and electricity have jumped and will calm down if it doesn't seem as if you're price gouging or being greedy. In general, rent increases should be about 4 to 6 percent. Some landlords on the high side would go up to 10 percent. Let the market in your area be your guide.
When you talk to your tenant, emphasize that you haven't had an increase for quite a while — tell long-term tenants exactly when that was — and explain that you can no longer ignore increasing the rent. Your tenant might not like the increase, but after thinking about the cost of moving to another place and finding out that similar apartments are in the same price range, most likely she will stay put.
You can also soften the blow by giving the tenant a higher estimate of the rent increase than you think will be necessary, so that once you've determined the actual amount you need to raise the rent, the tenant will be happily surprised by an amount that is lower than the one you quoted at first. Try to avoid the opposite scenario, which would leave you with an upset tenant asked to pay more than you originally estimated.
If you keep good records on income and expenses, you can figure out whether the rent you're collecting is high enough to pay the bills and still give you a profit. Go over those figures at least once a year.
Tenants are savvy. They know it takes more money to run a household nowadays and that you're essentially paying expenses on two of them. If what you ask sounds reasonable, they will be, too.
Avoid the Appearance of Retaliating
If your tenant made a complaint or you've recently had a dispute, don't turn around and raise rent three or six months later. If you do that it might look like you're still harboring bad feelings and doing it in retaliation. Many states specifically prohibit raising rent within a time period established by state law. Consult your lawyer or professional organization if you have questions about when and how to proceed without your tenant filing a legal complaint.
Postponing the Increase
When you are contemplating raising rent, you should also consider what it will cost you to advertise, screen, and prepare for a new tenant should yours decide to move because of the increase. If the increase you're thinking of is about as much as the expense of finding a new tenant, it might be better to postpone the increase until your current tenant moves out for other reasons.
Instead of periodically raising the rent, you might want to try annual increases that reflect the increase in the cost of living. Boosting rent by 1 or 2 percent a year shouldn't upset a tenant, especially if it has been written into the lease. Whichever way you go, you're not locked into that decision. You can always change your policy for increasing rent as soon as the current tenant moves out and you draw up a new agreement.