How do you communicate rent increase to tenants

[Jeni Nikolova]

Hello,

What is a good and (if possible) kind way to communicate to tenants that if they were to renew the lease, the rent will be increased at the legally allowed rate, which in this case is 10%?
They are currently in their third year and last year had $0 increase …

I posted the home on Zillow, at 13% above the current rent, and there is a healthy amount of interest so my guess is the current rent is way below market rate.

I would appreciate insight from people who have gone through this and/or others who have good advice.

[John Underwood]

I never bump rent more than 5% on a good tenant. Just because you can do 10% doesn't mean you should.

A good tenant is a valuable asset and a turnover will cost you more than you can make on a rent increase to market price.

[Marcus Auerbach]

@Jeni Nikolova you are overthinking this. You just send what we call in Wisconsin a renewal notice where they can check the box that they want to stay and it lists the new rent. Most tenant's expect this and if they didn't they will ask around.

Our philosophy is to increase rents in a sensible way, for example last year we did 5% which was in line with the increase in wages. We don't want to gauge just because because we can and also the increase in cash flow is tiny compared to the cost in turn over. Residential buildings (1-4) don't benefit from an increase in NOI, so it's a different dynamic with apartment buildings.

[Nathan Gesner]

Quote from @Jeni Nikolova:

I send them a written letter with their options, a deadline for their response, and a consequence if they fail to respond.

Example: 

Dear Tenant, 

Your lease expires on 4/30/2023. We are offering you the following options:

1. Extend the existing lease for an additional year at a rate of $1,000 per month, starting 05/01/2023 and ending on 04/30/2024.

2. Continue on a month-to-month basis at a rate of $1,250 per month. Keep in mind a month-to-month lease may be changed or terminated at any time with 30 days notice.

3. Vacate at the end of your lease no later than 11:59PM on 4/30/2023.

If we do not receive your response by 4/30/2023, then your lease will automatically continue on a monthly basis under option #2.

Obviously doctor it up, but that gives you an idea. Make each option very clear. Set a deadline. Use a simple form at the bottom of this page for them to respond and sign so you have documentation.

[Jeni Nikolova]

Quote from @John Underwood:

I never bump rent more than 5% on a good tenant. Just because you can do 10% doesn't mean you should.

A good tenant is a valuable asset and a turnover will cost you more than you can make on a rent increase to market price.

I agree wholeheartedly on the point about good tenants and for that reason there was zero rent increase in the prior year. 

[Ray Hage]

This is a touchy subject but I think rents should be increased every year. Even for the best of tenants, I would still make a small increase like 2-5%. If the tenant is difficult, I usually make a larger one because if things break more often or tenant is always late, it may not be worth having them there. How to communicate it? I let them know well in advance that there will a rent increase. About 1.5 months, I let them know what the new rent amount will be. 

I think I only ever had one good tenant move out in that last ~6 years because of a rent increase.

Your bills are going up every year. Property tax, utilities, cost of labor to fix things, materials, etc all tend to go up. Rent needs to keep up

[Frank Patalano]

Quote from @Jeni Nikolova:

Hello,

What is a good and (if possible) kind way to communicate to tenants that if they were to renew the lease, the rent will be increased at the legally allowed rate, which in this case is 10%?
They are currently in their third year and last year had $0 increase …

I posted the home on Zillow, at 13% above the current rent, and there is a healthy amount of interest so my guess is the current rent is way below market rate.

I would appreciate insight from people who have gone through this and/or others who have good advice.

 So I will preface by saying that I do not know CA or San Diego specific rules. 
I would suggest a rent increase or 7 or 8% instead of the full max allowed.
In the future, It would be easier if you increase a standard amount every year. 5% or $100 or something like that.
In your letter, you could mention increased costs, inflation, etc. Some landlords like to say it. Some don't.

Definitely send a letter.  In my state, the letter needs to go out and you need to wait 30 days after the beginning of the next rental period. So if I was going to mail today, the first month with increased rent will be the payment due on June 1st.
And if they are senior citizens it is 60 days.

[Eliott Elias]

It is neither kind or mean to increase rents, it is a business decision. Raise it and move on. 

[Jeni Nikolova]

Quote from @Ray Hage:

This is a touchy subject but I think rents should be increased every year. Even for the best of tenants, I would still make a small increase like 2-5%. If the tenant is difficult, I usually make a larger one because if things break more often or tenant is always late, it may not be worth having them there. How to communicate it? I let them know well in advance that there will a rent increase. About 1.5 months, I let them know what the new rent amount will be. 

I think I only ever had one good tenant move out in that last ~6 years because of a rent increase.

Your bills are going up every year. Property tax, utilities, cost of labor to fix things, materials, etc all tend to go up. Rent needs to keep up

@Ray Hage, this is very helpful, thank you!

[Dan H.]

I see a lot of responses from people not in the San Diego market.

First, I want to confirm this is a MF unit and that CA rent control (AB1482 applies). AB1482 does not apply to SFH, condos, townhouses, etc. It also does not apply to a duplex if the duplex is OO and the tenant was placed after the OO.

Second, I agree with the posts that indicate that doing annual increases is better than hitting the tenants up with a larger increase.  What I typically do is the first increase lets a good tenant get a little below market rent and then I try to have rent increases that prevent their rent getting way before market rent.

Where I disagree with many posts is the to request less than 10% rent increase.  These posts do not know the San Diego rental market and the size of average rent increases in this market (which is another reason that many people do not understand that San Diego is a outstanding cash flow market for the long term hold).

CBRE states March to Marcy YOY average City of Sn Diego was 11.6% with a 2.8% vacancy rate.  Believe it of not, CBRE is the lowest estimate of average rent increase I am aware of.  Rentometer shows 17% (or ~$500/month).  Core Logic last I saw was showing 16%.  My point is your 10% rent increase over the last 2 years likely puts you at still more than 10% and possibly approaching 20% below market rent.  

Rentometer: San Diego, CA

Giving notice is easy.  At least 60 days (required for tenants with more than 1 year occupancy) prior to the rent increase, send a letter informing of the rent increase.  Let them know that if the increase is not acceptable for them to let you know as soon as possible but not less than one month before they plan to vacate.  

Good luck

[LaTonya Clark]

@Jeni Nikolova

[LaTonya Clark]

@Jeni Nikolova

Always let your tenants know from the very beginning that the rents are expected to go up to 5% a year. If you let them know ahead of time, it won’t be a surprise but all tenants , I would think, knows that the rent will increase.

[Ray Hage]

Quote from @LaTonya Clark:

@Jeni Nikolova

Always let your tenants know from the very beginning that the rents are expected to go up to 5% a year. If you let them know ahead of time, it won’t be a surprise but all tenants , I would think, knows that the rent will increase.

 100% agree with this. If the prospective tenant is worried about a small increase in rent year over year, they may already be living at or beyond their means. It's rare that rents stay the same in any market

[John Morgan]

@Jeni Nikolova

I text him 60 days out and ask if they want to renew at xxxx amount. They always text back and accept the increase. Most actually thank me. Lol. But I keep them all below market rent by a couple hundred or so and they appreciate it. In return, I have zero turnovers which helps my costs. And they don't bother me for little things which I love. The annoying needy ones get market rent. Lol. If you treat your good ones well with low rent and great service, they'll take care of you and will be easy to self manage. If you try and squeeze every penny out of them because you can, it'll back fire on you. Go through a few turnovers and you'll see what I'm talking about. This is what works for me to keep my people for many years, and I've got 18 SFR.

[Jenny Cleary]

Quote from @Dan H.:

I see a lot of responses from people not in the San Diego market.

First, I want to confirm this is a MF unit and that CA rent control (AB1482 applies). AB1482 does not apply to SFH, condos, townhouses, etc. It also does not apply to a duplex if the duplex is OO and the tenant was placed after the OO.

Second, I agree with the posts that indicate that doing annual increases is better than hitting the tenants up with a larger increase.  What I typically do is the first increase lets a good tenant get a little below market rent and then I try to have rent increases that prevent their rent getting way before market rent.

Where I disagree with many posts is the to request less than 10% rent increase.  These posts do not know the San Diego rental market and the size of average rent increases in this market (which is another reason that many people do not understand that San Diego is a outstanding cash flow market for the long term hold).

CBRE states March to Marcy YOY average City of Sn Diego was 11.6% with a 2.8% vacancy rate.  Believe it of not, CBRE is the lowest estimate of average rent increase I am aware of.  Rentometer shows 17% (or ~$500/month).  Core Logic last I saw was showing 16%.  My point is your 10% rent increase over the last 2 years likely puts you at still more than 10% and possibly approaching 20% below market rent.  

Rentometer: San Diego, CA

Giving notice is easy.  At least 60 days (required for tenants with more than 1 year occupancy) prior to the rent increase, send a letter informing of the rent increase.  Let them know that if the increase is not acceptable for them to let you know as soon as possible but not less than one month before they plan to vacate.  

Good luck

Thanks Dan, this was super helpful 🙏