Landlording & Rental Properties

Rent Increase: Why You SHOULD Raise Rates on Your Tenants Sooner Than Later

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I used to live on an unusual street, where half of the properties were small rentals and the other half were larger, owner-occupied properties. At one point, a neighbor of mine received notice of a rent increase of $500 a month when his lease was to renew later in the year.

And no, we don’t live in Silicon Valley.

Of course, my neighbor wasn’t happy to receive this news and immediately began looking for a new place to live. The problem was, I was pretty sure he’d never find it. See, he’d been living there for seven years—paying the same rent the entire time.

Rent Increase Overdue

Seven years prior, he was paying market rent. The $500 increase would’ve brought him up to just below market. I bet his landlord actually could’ve gotten another $100 to $200 out of the property if he really tried.

Of course, he’d have to fix the place up, because he put exactly nothing into it while the tenant lived there for seven years—and you can tell.

But a sudden, large rent increase like this isn’t ever going to win a landlord any popularity contests. That particular landlord most likely didn’t increase the rent after the first year because that was 2010, and the market was extremely soft. Ditto in 2011.

In 2012, the market started to perk up, but perhaps the landlord was dealing with a vacancy at another property. I’m not sure why he didn’t raise it then.

In 2013, our town and numerous surrounding towns experienced a massive flood that killed eight people and caused more than $2 billion in damages, including all but wiping out the town directly upriver from us. Vacancy rates dropped to zero almost overnight, and rents soared. That whole supply-and-demand thing in action.


Rent Increase REALLY Overdue

Yes, the landlord would have had to honor any lease in place at that time, but my neighbor’s renewal in 2014 should have come with an increase.

Related: How to Raise Rent on Your Tenants as Painlessly as Possible

So two years later, my neighbor was faced with a massive rent hike. He was not happy—obviously.

No Rent Increase with Multi-Year Leases

This also highlights the negative reasons to sign multi-year leases. I routinely see questions from new landlords who feel they have hit the jackpot when a prospective tenant wants to sign a two- or five-year lease. You can hear their relief that they won’t have to fill a vacancy for that many years.

Let’s ignore the fact that the tenant is most likely agreeing to an extended lease for less-than-awesome reasons. You, the landlord, are now locked into that rate for the life of the lease—no matter what your local market does or how much rents increase in that timeframe.

And since you can’t predict what the rental market will do, even if you negotiate a rent increase for the subsequent years, you could be under-negotiating and leaving money on the table.

Basically, the multi-year lease doesn’t give you many benefits, but there are a whole boatload of downsides.

Rent Increase Done Right

Let’s play pretend. Pretend you have a vacancy where the current market rent is $1,000 a month. Your tenant screening finds you a well-qualified tenant who can easily afford the monthly payments, so you sign them up.

During the sign-up process, you tell them that you keep your properties in excellent shape, so should they discover anything in need of repair, they should notify you. This is an excellent time to share with them what constitutes a call-anytime-emergency—water leaking, furnace inoperable during winter, fire, etc.—and what does not constitute an emergency—light bulb burned out, microwave not working, doorbell inoperable, etc.

You also inform the tenant that you keep your property rents in line with the market and rents may or may not increase at the beginning of the next lease term, depending on the market rate in the area.

The first year goes well. You contact them 30-60-90 days before the end of the lease term (in compliance with your state’s landlord-tenant laws) to see if they want to stay another year. Your local market rents have increased $100 a month. Here’s where the tricky part comes in.


How Much Do You Increase Rents?

You’ve already set the stage by mentioning to them at the beginning of their first lease term that rents may increase. A $100 increase will give you an additional $1,200 during their second year, but if they choose to leave your property, how long will it take you to turn it around? One lost month of rent will all but eat up that rent increase. Is it worth the gamble?

Related: What’s More Costly: Rental Vacancies or Filling Rentals With Subpar Tenants?

What if you split this year’s increase with them? Or only increase it $75 instead? Most tenants who were considering staying won’t leave over $50—especially if you have properly screened them and they are financially able to afford the payments in the first place.

Colleen F. shared this letter in the forums a while back. She sends this out in accordance to her state’s timeline for notice:

“Thank you for being a tenant here at 123 Main St., Anytown, USA. Our goal is always to provide a nice place to live, at a fair price. Whenever the prospect of raising rent comes up at any property, we take a good hard look at it to make sure it’s necessary.

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In that light, we have decided it is necessary to raise the rent on your unit, effective Apr. 1, 2014, to $900 from $850. This is partly to offset the increasing cost of property taxes, insurance, high heating oil, maintenance costs, and upgrades since our purchase of the building in 2010.

Even after this increase, we believe we are still at or below the average market rent for a unit of this type. Rather than pay an increase, you may choose other housing. Should you intend to vacate at the termination of your lease, the original lease agreement states that you have to provide 30 days written notice of your intent to move. If you choose, signing this form checking off that you will not renew and returning the form to us 30 days in advance of your expected renewal will be considered your written notice.”

Colleen’s letter is direct and covers the main points necessary. Here is the increase, the date it is effective, a reminder that you need to give XX days notice if you intend to vacate per the terms of your lease, and a very easy way to do so.

Don’t Leave Money on the Table

Your tenants expect incremental rent increases when the lease is renewed. Compare your property to what is available at the time you are considering the rent increase. Other properties offering less amenities at a higher price are a good indicator you’re under market—and you should raise your rent!

How do you raise the rent on your current tenants?

Share your experiences with rent increases below.

Mindy Jensen has been buying and selling homes for more than 20 years. She buys houses, moves in, makes them beautiful, sells them, and starts the process all over again. She is a licensed real est...
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    Patsy Waldron Rental Property Investor from Orlando, FL
    Replied over 3 years ago
    What if the multi-year lease were to include an annual increase (say, 5% or 8%, whatever seems to reflect the average annual increase in the area)? It seems that would solve the problem of rents falling below market rates, but also allow the advantages of locking in a long-term tenant. Is that possible/legal? I know a retirement community that has leases that specify an annual 5% increase, which seems a good way to inform people up-front of what they can expect.
    Bryan O. Specialist from Littleton, CO
    Replied over 3 years ago
    You can do that, but a multi-year lease locks the landlord into that tenant for multiple years. If a tenant wants to break lease, they’re going to break lease. The penalty is (usually) the same no matter what. Most states do something like they pay you during the vacancy after they leave, you have to try and fill it. So a longer lease only has impact on the landlord. I like 1 year leases because banks like them, tenant’s know them, and if life changes for the tenant it isn’t too long to ride out till the end (usually).
    Jerome Kaidor Investor from Hayward, California
    Replied over 3 years ago
    OK. First of all, I NEVER give out multi-year leases. I don’t even give out one-year leases unless circumstances ( e.g. Section 8 ) force it. Everybody is month-to-month. Why? First of all, a lease deprives me of the 30-day-notice-to-vacate tool. What if, in spite of my best efforts, I rent to somebody evil? Say, a drug dealer? Nice to be able to say “sorry, it didn’t work out, you have to go”, instead of taking him to court and proving he’s a drug dealer. Advantages to me of a lease? Not much. If they break the lease, you’re pretty much screwed, because they are – for the most part – judgement proof. Now – rent increases. I revisit rent once a year. If the market warrants, I do a small increase. I own a building in Hayward, CA near Silicon Valley. Hayward has rent control, and the market rents have far outstripped my ability to do rent increases ( which are limited to 5% a year ). It’s OK, the building makes money even with existing rents, and I get to hit them with a 5% increase every year for the next decade. We generally don’t do more than 5% anyway because…. We used to be renters ourselves. I still remember getting a rent increase from $300/month to $360.00 – 20 percent! We immediately started looking for a house. We had been saving for that for a couple years anyway, but that rent increase really lit a fire under us. I always give a 60 day notice. That way, they have time to get used to the idea. At the beginning, the increase is two months away, and they set the notice aside & forget about it.
    Anthony Wilks
    Replied about 2 years ago
    That may work in Cali, but try that in the midwest, during the winter. 1 year leases that expire in the summer time work well here. Nobody wants to move when its 20 degrees below zero and snowing.
    Replied almost 2 years ago
    Hi Jerome I know this is a bit old, but hopefully you’ll see my reply. I’m a small investor and own a handful of single-family rentals, and am still learning and trying to improve my land lording skills. I totally agree with your strategy of M-to-M vs. a year lease. I did make the mistake of not increasing the rents for a number of years (taking a very passive approach) and right now I’m facing the consequences of my mistake. Of course, if the rents are way below market, tenants won’t make waves and will deal with any problems with the unit themselves and won’t call you, so you don’t get upset and start thinking about increasing the rent. I was happy with that since most rentals had a small positive cash flow, which I enjoyed almost “trouble free” for some years. Now, a few years later, I realize that most rentals in my area are now 20 to 30% higher than what I’m charging, and I see now that I’ve been losing thousands of dollars per year, which highly over weight the potential repairs I did not have to do over those years. So in trying to fix that mistake now, my first strategy was to try to get the tenants out, and start fresh with new tenants at a much higher rent (but still at market prices). I started doing this in waves with 3 units first, so I served a 60-day notice to vacate to the 3 tenants. On the first unit the tenant moved out quietly with no problems, however, the tenant for the second unit left, but I suspect that they came back at night and cut the toilet intake hose and let the water run overnight. The next morning the entire house was under 1.5 inches of water. I’m dealing with the insurance now and it looks like they will pay, but I don’t know how much yet. For the 3 unit, the tenant told me last night that he is no paying the rent for this month as he is trying to move out within the next few days. I told him that he still has to pay for every day he is in. He will let me know tomorrow how many days he will need to move out. HOPEFULLY he will pay me for those days. The house is almost trashed, so the deposit might not even cover all the repairs, so I’m at his mercy right now. If he doesn’t pay by tomorrow I will have to serve a 3-day notice. We will see on that. Since the “vacating” strategy didn’t go quite well, I switched over to a rental increase instead of vacating the units. So I served the next 3 tenants with a 60-day notice to increase rent by 20% yesterday. What do you think of that? Anybody else here would like to comment on which “fixing” strategy would work out better? Any other strategy proven to work better? Thanks.
    Jerome Kaidor Investor from Hayward, California
    Replied almost 2 years ago
    IMHO You’re best to get rid of the tenant with the trashed house. Then fix it and rent it at market. I would never hit a good tenant with a 20% rent increase. For a good tenant, I’d spread his pain over a couple years – max 10% a year.
    Jerome Kaidor Investor from Hayward, California
    Replied almost 2 years ago
    IMHO You’re best to get rid of the tenant with the trashed house. Then fix it and rent it at market. I would never hit a good tenant with a 20% rent increase. For a good tenant, I’d spread his pain over a couple years – max 10% a year.
    Christopher Smith Investor from brentwood, california
    Replied over 3 years ago
    I tend to agree with your philosophy on rent increases, although many do not. I try to build in (at least as a minimum) a 3% increase each year no matter what occurs. It of course will be more if rents are rising significantly faster than that in the given locality. If I don’t do this, then I am first likely not keeping up with my own increasing costs (which are probably in the range of 2% to 3% each year), plus second you have to deal with the cliff effect you describe above and hit the longer term tenant with a massive one time increase which never goes over well. This cliff effect increase can be huge if you are in an area with rapidly increasing rental rates as my properties are in. Of course you will hear those that say you will risk losing a long term tenant if you follow this approach, and there is always a chance one will leave (for any number of reasons). However, a couple of points on that. Tenants in my properties (a little more upper end than most landlords) can’t easily pull up stakes and move at whim. The have some pretty significant costs to consider themselves. Plus if your rate increases are generally sensitive to local market rental rates (which they should be just as a matter of practicality), then the Tenant really won’t gain much if they do move. Finally, if a tenant dramatically balks at lets say at a reasonably modest 3% increase, then perhaps they are not that great of a tenant to begin with so the loss while a short term cost may be the better long term outcome. Finally from my past experience with my property managers, I have almost always set higher rental rates than they recommended to me and I have never failed to get them, not once, nor have any of my tenants ever moved because of my rental rates (at least if they are being honest for there decision to move communicated to my property managers). Of course rental rates have to be reasonable, but the market will ensure that. So just remember one thing; there is just as much risk in leaving rental rates unchanged when they should be increased, (and they should raised at least annually absent extraordinary events), as there is in raising rates to reasonable levels every year.
    Katie Rogers from Santa Barbara, California
    Replied about 1 month ago
    The thing that a lot of people fail to consider is that people's wages have been stagnant for many,many years. They have not been getting annual raises of 3%. Eventually, tenants become cost-burdened, defined as paying more than 30% of salary to rent. Half of cost-burdened tenants are paying more than 50% of their salary to rent..
    Replied over 3 years ago
    Im a newbie using a property management company, and my concern about raising rents is that not only do I risk the lost rent from tenant turnover but also the leasing fees charged by the PM company which is basically another months rent. So from my point of view if i raise the rent $50 and it causes a vacancy, it could potentially take a few years just to break even on the raise. Any suggestions about this situation?
    Jerry Agbon from Raleigh, NC
    Replied over 3 years ago
    Great article, very objective advise with practical application. While I’m in complete agreement with you, I see this as being more applicable to a market tenant, however when dealing with section 8 tenants, one might have to play a different hand. I’ve noticed that while some section 8 allows for annual lease renewal, which provides room for reasonable lease increment, some of the section 8 program don’t allow for lease renewal. Instead the annual lease agreement converts to tenant at will. In this case, does it mean that once the tenant becomes tenant at will, the landlord is now free to give rent increase notice to the section 8 concern, at any time of the year?
    Peter Crisp Engineer from Surrey, BC
    Replied over 3 years ago
    Being up in Canada, most provinces have rent control caps – and some are very tight. Ontario this year is 2.0% and 2017 is 1.5%. The latter is likely below inflation. In other words, we have to raise rents or else this is a permanent income loss (unless they move out) and I look for savings in the areas of energy costs and other areas if I can. It also means renting at market when the opportunities come up. Exactly as above, we communicate to all our tenants that rents are increasing because of increasing taxes and other expenses. And the tenants see that good maintenance is done and they want that to continue. I also make it clear that, if rent controls apply, we have no choice but to raise rates and why. If you do that, then tenants don’t usually mind. In fact, I have a place I’ve been turning around in New Brunswick, Canada, where the tenants said they’d be happy to see rents go up, if it meant helping to fix the place up. Don’t see that often – but we are fixing the place and we are raising rents modestly (and there are no rent controls in the province). I’m going to add a political comment. Too many tenants rights groups, at least in Canada, seem to have no understanding about the negative effects of too-tight rent controls and as responsible owners, we need to fight this. For example, if Ontario persists in this course, I will probably either sell or invest in other provinces or States because I want to have well maintained properties at a fair profit margin, and I see no shame in that. Some tenant groups here want to go back to permanent rent controls on the unit, which would make things worse. There are better ways to making housing affordable, and we need a dialogue to work together on this issue.
    Jeff Deleon
    Replied over 3 years ago
    Interesting article, I do check the market for rental rates to make sure I am not leaving money on the table. I have never considered a multi-year lease, I can only imagine the headache that could potentially cause.
    Timothy Friars
    Replied over 3 years ago
    Unless rental rates tank for some reason. In that case you’re getting more out of the place than you otherwise could.
    Thomas Ebenhoch from Troy, New York
    Replied over 3 years ago
    Any advice on raising rents on a newly purchased property with the current rents way below market rate?
    Mindy Jensen BiggerPockets Community Manager from Longmont, CO
    Replied over 3 years ago
    Hi Thomas. If the tenants have a valid lease, you cannot raise the rent until the lease ends. In accordance with the landlord tenant laws of the state the property is in, give notice that you will raise the rent to $X, and the date the increase is effective. (I really like Colleen’s note above.) If they are month to month, give them proper notice and increase the rent. ‘Way below market’ could be why the previous owner sold the property. How much work would have to be done to re-rent the units?
    Margaret Weyandt Investor from Williamsburg, Pennsylvania
    Replied over 3 years ago
    @Thomas Ebenhoch Thomas, I have purchased several properties with existing tenants and below market rents. These tenants did not have a written lease with the prior owner. My solution was to give tenants a letter to introduce ourselves and explain how we do business and what we expect – including rent. I also inform them how much we typically get for their size unit. For example: a 2 bedroom rents for 500 and market is 650. I would let them know that I am giving them a 2 month lease (I always use written leases) with their current terms. Then explain that the next lease will be a year long lease at a higher rate ie: 550. I explain that we will continue to raise the rent with each lease until market rents are reached. The two month lease gives them time to find somewhere else, and for us to evaluate them as tenants. Then the rent raise isn’t a huge amount to cause a hardship but it also gives me enough to cover my costs more easily. This may not be what most people do but I figure if I find a place where there are decent tenants I don’t want to start over by slamming them with a huge increase but at the same time I need an increase as well. In addition, I also make sure that there is some cash flow before purchasing the property at the current rates. That way, I know I am not losing anything even in the first two months.
    Mark Spidell from Glenwood Springs, Colorado
    Replied over 3 years ago
    I have found that by having supporting reasons for raising the rent is helpful. Property taxes, insurance and HOA dues are pretty easy and transparent. Market adjustments are more qualitative, but tools such as zillow and rentometer can help support your argument although not perfect tools. Present the market in a light that shows the tenant that they are still getting a good or at least fair deal compared to what is currently available. Having leases end during the spring and summer also help. I will often sign tenants to odd lease terms like 14 to 16 months so that the lease ends during a more favorable time. By doing this, you can either find a new tenant more easily or your current tenant will be looking at a more competitive market to compare your higher rent amount against.
    Marcus Robert Investor from Worcester, Massachusetts
    Replied about 2 months ago
    Leases over 1 year are subject to the statute of frauds
    Cal Predom Investor from Northeastern NC
    Replied about 1 month ago
    I have made the mistake of not raising the rent to market rate. Small increases are better than waiting and then increasing the rent a large amount. I have been trying to improve reviewing the rents in my rent locations. I setup a calendar reminder to check on the rent amounts in my market. I try to review the local rent amounts 3 months before my leases end.