How To Calculate a Rent Increase

August 17, 2022 0 comment

Written by: Eric Davis

Increasing rent is a reality that both the renters and property owners wish they could avoid. For tenants, it represents an additional burden that may affect their quality of life, or worst, an upheaval as they may need to start looking for more affordable accommodations. On the other hand, property owners might be forced to ask rental increase if it is the only way to cover expenses. This decision may cause them to lose a vetted tenant they get along with and open their property to an uncertain market. Given how hard and sensitive raising rent is for both parties, it must be done carefully and with proper planning. One rule that needs to be remembered in increasing rent is that the rent increase should cover the additional expense caused by inflation; otherwise, it will be pointless to increase the rent.

The picture shows rent increase.

There are several reasons why a landlord may decide to increase rent. Listed below are the most common ones.

  • Property tax increases
  • Rising maintenance costs
  • Business expansion
  • Market fluctuations
  • Property improvements

Like any business transaction, rental increases should be done legally and fairly to avoid unnecessary issues that may cause problems later on. All increases must follow local laws, and tenants should always be given advance notice.

You can use the following guide to ensure you conduct your rent or lease increase properly.

Key Points for Increasing Rents on Your Properties

The target of a rental increase is to raise your monthly cash flow without pushing tenants out. The process requires proper preparation to make sure everything will run smoothly. Property managers must take time to know market averages and give tenants advance notice. Many states have laws that limit rental increases, which must also consider during this time. Therefore, your unit must be priced in line with rent laws and market value.

Below are a few tips on legally and fairly managing the process of increasing your rent.

  • Learn state and local rent laws and make sure to follow those regulations.
  • Research the neighborhood and look for the average rent and tenant turnover.
  • Calculate a proper rent increase by evaluating the status of the property.
  • Give a formal rental increase letter to tenants with an appropriate time allowance.

Research Local Rental Laws

The most important factor when increasing rents is acting in compliance with state and local laws. Make sure that your real estate investing business follows every regulation in the area. First, you should research the area. Check your state online and seek out .gov and .org websites, which will contain the most reliable information. It is a certainty that there are regulations outlining the frequency at which rental increases can be applied or how to present them to your tenants legally.

After confirming state laws, check city and county regulations in which the property is located. Specific cities have established rent control laws dictating how much landlords can increase the rent within a given period. Like in Los Angeles, real estate investors can raise the rent by up to 5 percent within a given year. Be alert about the change in regulations. Specifically, if you live in a popular market, you should monitor the news for new housing policies. The research phase of the process will answer, “how much should a landlord raise the rent?”

It shows the rental law between landlord and tenant.

Do Market Research
Before planning a rental increase, you must understand how your property is priced compared to other units. This information will help you determine the new rental rate—research the surrounding buildings and neighborhoods. Look for the rental prices of similar properties in your area. In searching, websites like Zillow and Trulia are great tools, as they show property listings and market insights. Take notes on the rental cost, unit size, and amenities close to your property. These factors will help you know if your rental increase will lead to boosted profits or potential vacancies. Understanding the property’s history of rental increases can serve as a reference for future changes.

Calculate How Much to Raise Rent

A standard rental increase is calculated by getting a percentage of the current monthly rent, typically from one to ten percent. For example, renting an apartment for $1450, a 3% increase would be about $43. Most tenants will have an idea and expect an increase around this amount, especially if it is during lease renewal. If you want to raise a higher percentage, the best approach is to implement incremental expansions rather than all at once. It means you could increase it by $43 for two years, resulting in a six percent increase over time. Not only does this procedure make it easier for tenants to acclimate to the higher rental price, but it can also help you act in compliance with regulations in your place.

To determine the exact increase for your rental property, use your market research as a reference point. This research aims to help ensure your price is in line with comparable properties; that way, you can maximize monthly rental income and minimize potential move-outs. Calculate those correctly if you have different unit types with different rental rates. A set price increase may not apply to each unit type in your property. Keep it in mind as you learn your new rent prices.

Sending the Rent Increase Letter to Tenants on Time

Communication is the key to avoid misunderstandings_ this quote also applies to your rental property, especially if you are increasing rent. Your proposal for a rental increase letter should be two-fold: first, it should follow any legal regulations in the area. Second, rent increases should be respectfully communicated with your tenants. Most of the states will require 60 days’ notice. Depending on your tenant’s tenancy (fixed-term or month-to-month), you need to communicate the increase differently.

                                                The photo shows a notice of rent increase.

The common question is, “can a landlord raise the rent without notice?” The short answer is no. The long answer is that even if you have the power to increase the rent without notice, your tenants will likely leave your rental property as soon as possible. A rental increase letter should include:

  • The price increases.
  • The new monthly rent.
  • The start dates.
  • Any other relevant information.

If you are increasing rent to open new amenities, point out that information in the letter. Even though you are not required to have an explanation, most tenants will respect the transparency you made. Always remember that sending a rent increase letter to tenants with advance notice is legally required and helpful to your residents.

Before increasing rent, consult your local laws and market prices to ensure you are legally covered. Once you have settled on a price, give your tenants advance notice. When handled correctly and carefully, a rental increase will not only improve your finances, but you will also maintain a good and positive relationship with your tenants.

Davis Property Management representatives acknowledge our responsibility to ensure our shared success by practicing and promoting the highest ethical standards. We will consistently treat our relationships with our owners, tenants, vendors, and the community with respect, honesty, dignity, and fairness. Call us now at 425-658-7471 or send us an email at [email protected].

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