The Right Way to Raise Your Tenants’ Rent (Plus: Sample Rent Increase Notice)

The Right Way to Raise Your Tenants’ Rent (Plus: Sample Rent Increase Notice)

6 min read
Mindy Jensen

Mindy Jensen has been buying and selling homes for more than 20 years. Her preferred method of investing is the “live-in flip”—she buys a house, moves in, makes it beautiful, sells it after two years to take advantage of the Section 121 Capital Gains Exemption, and starts the process all over again. She is currently working on her ninth live-in flip.

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Mindy is a licensed real estate agent in Colorado, author of How to Sell Your Home, and the Community Manager for BiggerPockets, where she helps new and experienced investors learn the proper ways to invest in real estate to grow their wealth. She’s also the co-host of the BiggerPockets Money Podcast.

Mindy is passionate about financial independence and wants to help as many people reach this milestone as possible, so they can live their best lives.

As both an agent and an investor, Mindy LOVES real estate. She has taken part in syndications, private lending, and deals involving seller financing. She owns a single family rental, a short-term rental, a mobile home park, a co-working space, and her most recent purchase—a caboose!

Mindy is an alumnus of the School of Hard Knocks and will happily share her experiences with anyone who asks. When you can get her to stop talking about real estate, you can find her on her bike or adventuring in the beautiful mountains of Colorado.

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Mindy has been featured on 1500Days.com, CNBC’s Make It, 60 Second Docs, as well as podcasts like Money Nerds, The FI Show, Stacking Benjamins, and How to Be Awesome at Your Job.

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Regularly raising the rent keeps your properties in line with market rate. But you can’t just issue a rent increase willy-nilly—the first step is finding out if it’s even possible. When a tenant is in a lease, the rent is fixed for the term of that lease and cannot be raised until after the lease is over. This is why rent raises are most common upon the renewing of one’s lease.

Before we dive into the rent-increase details, a quick caveat on compassion: With the economy struggling and the pandemic still devastating Americans, it’s important to consider your tenants’ circumstances. That doesn’t mean you can’t raise rents—but keep compassion in mind as we recover from COVID-19.

However, month-to-month rental agreements typically allow you to raise the rent at any point, as long as you give enough notice. Usually, that means 30 days—but sometimes 60 days’ notice is required. Check your local landlord-tenant laws.


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Also, if you are in an area with rent control, where the government controls rental prices, check carefully with your local laws. There is a good chance you won’t be able to raise the rent at all.

(Despite this, there are pros and cons to rent control. Investors shouldn’t always shy away from these properties!)

Is it time to raise my rent?

There’s an easy way to know when it’s time to increase rents: Look at the local rental market.

Compare your property to what is available at the time you are considering the rent increase. Other properties offering fewer amenities at a higher price are a good indicator you’re under market—and you should raise your rent.

Remember, most tenants expect incremental rent increases when the lease is renewed. And if you raise rents right, the change won’t be a surprise.

How much notice should I give?

The answer to this question depends on where you live. Some states or municipalities require giving at least 30 days’ notice—but others insist on 60 or even more. Pay attention to local laws and get the appropriate legal advice before sending out rent increase letters.

How to increase rent… the right way

Let’s play pretend and say you have a vacancy with a current market rent of $1,000. Your screening finds you a well-qualified new tenant who can easily afford the monthly payments, so you sign them up.

When onboarding your tenant, tell them that you keep your property rents in line with the market. Because of this, rents may or may not increase for the next lease term, depending on the market rate. This gives them a heads-up about what to expect, ensuring no surprises.

The first year goes well. You contact them 30, 60, or 90 days before the end of the lease term, depending on local 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 can you raise the rent?

You’ve already set the stage by mentioning that rents may increase. A $100 increase will give you an additional $1,200 during their second year—but if they choose to leave, or you’re forced into eviction, 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?

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 a new rent that’s only $50 more—especially if you properly screened them and they are financially able to afford the payments in the first place.


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Take a cue from marketers

Here’s another option for raising your rents—stolen from smart marketers. Don’t tell them what the new rental price is going to be. Instead, give them three price options to choose from.

Think about it. Almost every big business offers three price tiers:

  • Small, medium, large
  • Basic, premium, platinum
  • Bronze, silver, gold
  • Regular, premium, plus

By offering three choices, individuals tend to compare the choices given, rather than comparing the price to other businesses.

A coffee at Starbucks may be ridiculously priced, but by giving the customer options—the “Tall” for $3.25, the “Grande” for $3.75, or the “Venti” for $4.25—people rarely even consider the $0.99 cup of coffee they can get at the local diner across the street. Instead, they choose from the options they have been given. Of course, there are other reasons a person pays $4 for a drink, but the pricing tiers help to take attention off the price and give people the power to choose what price they want to pay.

Of course, you’re not asking your renters to choose between small, medium, and large. Instead, we recommend offering them lease length options with different rent amounts: two-year, year-long, six-month, or month-to-month. You should charge the most for month-to-month leases, because they are the riskiest.

Sample rent increase notice

The marketer’s tactic may not be for everyone. For instance, if you don’t want to encourage renters to switch to month-to-month or six-month leases, you may only offer a flat-rate increase. There’s no wrong choice—choose whatever option works for you. (We do recommend sending any letter via certified mail to ensure your tenants have received it.)

Rent increase notice with options

Dear John Tenant,

Thank you for your tenancy at 123 Main St, Apt 1! We’ve really appreciated having you here this past year and look forward to continuing our relationship with you. It is a privilege to be able to work with you, and we thank you for your business.

According to our records, it appears that your lease term is coming up at the end of next month and, as such, we need to discuss your future plans to make sure we are all on the same page. Due to naturally increasing expenses for the owner, it is necessary to gradually increase rent over time. Therefore, a slight monthly bump in your monthly rental rate will take place soon. However, we would like your input on where to go from here.

Please choose from one of the following options for your future at your home. Simply circle the option below you would like to choose and send the form back to us. We will prepare a new lease with the proper information and mail it to you within seven days.

Sign a new one-year lease at $1,050 per month, which will begin on September 1, 2020, and end on August 30, 2021. This is an increase of $50 per month.

Sign a new six-month lease at $1,075 per month, which will begin on September 1, 2020, and end on February 28, 2021. This is an increase of $75 per month.

Sign a new month-to-month lease at $1,100 per month, which will begin on September 1, 2020. This is an increase of $100 per month.

Although we hope you’ll stay with us forever, if you do not plan on renewing your lease, please let us know immediately. Our state law requires tenants to give 30 days’ written notice to vacate before the end of their lease. Therefore, please return this form and let us know your plans by August 1, 2020 so we can make that work for everyone.

Once again, thank you for your residency here at 123 Main St, Apt 1. We look forward to many more years of working with you.

Sincerely,

Management

Rent increase notice without options

Colleen F. shared this letter in the BiggerPocket Forums a while back. She sends this out in accordance to her state’s timeline for rent increase notices:

Dear John Tenant,

Thank you for being a tenant here at 123 Main St, Apt 1. 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.

In that light, we have decided it is necessary to raise the monthly rent on your unit, effective September 1, 2020, to $1,050 from $1,000. This is partly to offset the increasing cost of property taxes, insurance, high heating expenses, 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.

Sincerely,

Management

Of course, some tenants may still call and complain about the rent increase, or they may even decide to move, but most likely they will simply chalk it up to one of the realities of renting.

This article contains an excerpt from Brandon Turner’s The Book on Managing Rental Properties.

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