Is it OK to increase rent by 12%?
I have had these tenants for the past 6 years, always pay on time and low maintenance folks. I have held off on increasing rents for a couple of years in the past due to COVID but I can't absorb the rising insurance and HOA costs anymore.
I have to increase the rent by 12% to stay on the right side of things financially.
Is that OK to do so?
Thanks!
Your rent should be at market rates otherwise you are subsidizing someone else’s lifestyle. In terms of the actual increase percentage check with your local county/ municipality on whether or not there is a cap to rent increases. I see you are in CA which is tenant friendly just like Seattle (I am in Seattle and we do have a cap on increases)
Agreed with @Sergey A. Petrov. You need to know the local laws and ordinances. Beyond that, you do need to collect rent enough to make it possible to continue to rent the place. If expenses have been going up, you should be able to increase rent commensurate with that. Assuming the tenants are month-to-month, you could soften the blow by increasing small amounts over time. Of course, if you can't pay your mortgage, you'll have to raise rent more quickly. Nice of you to hold of on rent increases, but tenants have a hard time remembering that when the rent increase finally comes. If these are great tenants, then try to make it easy for them to raise the rent and explain why you are doing so.
@Anudeep Pradhan
I agree with @Sergey A. Petrov in CA there are some rules you have to follow involving rents increases. Unfortunately, when you invest in a blue/tenant friendly state you will always have more regulations and roadblocks that will prevent you from running your business efficiently. For your situation I hope you are CF+ and you did not listen to "experts" that said you should be looking for appreciation and to just buy everything whether it CF or not. If they are under market 12%, I would look to make up at least half of the difference this year. This depends on your location and quality of your property. For example, if rent is $2000 and you are at $1,800, I would raise them to $1900-$1950. Then every year I would slowly raise them to get them to market rate. Example if rent goes up $100 next year maybe I do a $75 hike. It is hard to give you a straight answer because there are so many factors that no one knows about your personal situation. If you are CF negative and you do not have a big reserve, you need to raise them as much as you can without risking them leaving if you do not have the money to get the property ready for the next tenant. If this is your only property you are probably not going to be as aggressive as someone who owns more doors because they can absorb vacancies easier. At the end of the day you are running a business and you need to increase rents as your margins are being squeezed by the government.
In line with the other posts here, and if I can add anything more, COVID relief has not been 100% removed from LA county rent increase moratorium. If this property is indeed in LA County, you'll want to seek professional advice from a legal source. I can provide a couple referrals if you'd like, otherwise a 12% increase is high for any CA city or county in pre-covid times. Hope this helps!
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As others said, check your local laws. I have some rentals in an area where there are limits on how much we can increase the rent. So each year, I increase the rent to avoid the problem you have now where you are below market and now need to do a larger increase.
Thanks everyone for your quick responses and inputs. It is very helpful and I have to strategize on my approach with my tenant. Appreciate your help!
@Anudeep Pradhan, yes, you can increase the rent by more than 10%, but you need to serve them proper notice. There are consequences if they decided to move out. For example, you may be liable for their moving costs. You can read more about that in here https://www.rhawa.org/covid-19
It depends on the city and what type of property it is, Condo, SFH, Multifamily, ect. Every city has different regulations on each, my advise, and something I just did on a lease listing of mine, is call the city and confirm that everything is up to code in your area. If you're good to raise rents with the city, I would have a sit down talk with your tenants and just be honest with them... let them know that you can't afford to keep their rent where it is as your expenses go up. Mention that you may have to sell if you keep it where it's at now. Most people will be accepting and would rather help you out rather than deal with the headache of you potentially selling the property.
Check your local jurisdiction. Understand what notice you have to provide and if you have any rent controls. If you are unsure, contact a local property manager who is experienced in your area and ask for a consultation. Be willing to pay for their expertise. They will keep you legal and in compliance.
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The laws are changing fast and furious, but as I understand it:
If your unit falls under CA rent control (and most do), increases are capped at CPI + 5% or 10% annually, whichever is lower.
LA City (not county) has a moratorium on rent increases. Last I heard, soonest it will be lifted is August 2023.
Lesson to take away from this is to increase rent any time you can because you may not be able to for many years. Also, make sure you give the proper notice. I believe those have been extended to 90 days in some cases.
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Quote from @Anudeep Pradhan:
I have had these tenants for the past 6 years, always pay on time and low maintenance folks. I have held off on increasing rents for a couple of years in the past due to COVID but I can't absorb the rising insurance and HOA costs anymore.
I have to increase the rent by 12% to stay on the right side of things financially.Is that OK to do so?
Thanks!
I agree with a lot of the commenters - if allowed legally, then by all means do it. This also shows the danger of "being nice" and not raising rents annually in line with market changes, that can lead to situations like this where its a rent shock all at once that leaves everyone upset (if you would have raised gradually over the past years, it wouldn't even be an issue)
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@Anudeep Pradhan please give the city and state your rental is located - otherwise no one here can give you specific or actionable advice! And the people in that local market will be able to find your post and contribute, or learn from the answers. Everyone is here to help if you give us enough information to!
Check the laws there but I agree with many of the first couples of commentators here. Following the market rate would help you out a lot. I believe the great tenants you have most likely will understand that as well. Best of luck!
Yes, I agree with many others on here. Increasing the rent by the following market rate makes the most sense.
Thank you all. Appreciate your responses and inputs.
Quote from @Michael Haas:
@Anudeep Pradhan please give the city and state your rental is located - otherwise no one here can give you specific or actionable advice! And the people in that local market will be able to find your post and contribute, or learn from the answers. Everyone is here to help if you give us enough information to!
The city is Chatsworth, CA 91311. Thank you Michael.