All landlords can attest that raising rent before a lease renewal is not always a great idea. This is especially true if you have a great tenant in your rental property.
Renting to a great tenant is every landlord’s dream. After all, they're not always easy to come by, despite how thorough one’s tenant screening process may be. Our team at Schambs Property Management knows how priceless good tenants can be.
Great tenants pay rent on time, treat the property with respect and care, rent long-term which leads to more financial security, and are less maintenance, among other things.
So, risking losing great tenants due to raising rent may prove not to be the best decision to make to increase your ROI.
That said, rising operational expenses can leave you with little to no options, forcing you to raise rent. The rise in operational expenses can be attributed to things like rising property taxes, maintenance expenses, insurance premiums, and utility costs.
But when and how should you raise rental prices without losing a good tenant? The following are some of the things to keep in mind for a successful rent hike.
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Familiarize Yourself With Local Laws on Rent Increases
As your first step, always know what you can and cannot do under local rental laws. These laws can vary from one local jurisdiction to the other. Some laws prohibit rent raises, while others cap the amount a landlord can increase it by.
For instance, North Carolina doesn’t have rent control and state law prohibits local jurisdictions from enacting their own rent control laws. Resultantly, landlords can raise the rent amount by any amount and as often as they choose to.
The rent increment, however, must not be borne out of discrimination of an FHA-protected class, such as race or national origin. It must also not be a retaliatory tactic against the tenant.
Include Rent Increase Details in Your Lease
Generally speaking, tenants usually expect a rent increment at some point during their tenancy. As such, you may want to spell out the details in the lease to avoid blindsiding your tenant.
In the lease, make sure to be as detailed about potential rent increments as possible while also being concise. Let the tenant know about things like:
- How often the tenant can expect a rent increase, i.e. annually or biannually
- The specific amount of the rent hike or the percentage increase
- The minimum notice the tenant can expect before the rent hike
- The time when the increase will take effect, i.e. at the start of a new term or a specific date
You should also include a requirement that the tenant provide you an advance notice on whether or not they will be moving out at the end of the lease. This will ensure you have ample time to prepare for the next steps.
Determine the Rent Increase Amount
Always do some research before raising rent. This will ensure you charge a competitive rent amount for the area and amenities your property offers. The last thing you’d want to do is either overcharge or undercharge tenants.
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If you raise it by a significant amount, you could stand at the risk of losing the tenant to your competitors. You may also have a hard time trying to fill the vacancy after the tenant moves out. If you lower it significantly, you may become unable to meet all your operational costs.
With that in mind, always make sure you do due diligence before you raise the rental price. Begin by checking what comparable units in the area are charging. If you find that the average price for comparable units is hovering, say, around $1,600, then it wouldn’t be wise to raise it to $2,000.
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Another metric to keep in mind before deciding on the rental price hike is the vacancy rate. Are there many units in the area that are vacant? Have you also had a difficult time renting out the unit in the past?
In areas with higher occupancy rates, raising rent should be the last thing a landlord should do.
An additional thought to keep in mind before raising rent is the rent increase amount. Even with a justified reason for raising rent, you’ll want to keep the amount as reasonable as possible. Being dramatic will only cost you a good tenant.
Generally speaking, a normal rent raise should not exceed 5 percent. For instance, if you’re charging tenants a monthly rent amount of $1,500, then the normal rent raise should be about $75 per year. But, of course, the specific amount of the rent raise will depend on a myriad of factors, including local rental laws and your current situation.
Upgrade Your Rental Unit
This is arguably the best reason to legitimize a rent raise. Some of the upgrades that can help you in this regard include the following.
- Updates to the kitchen or bathroom
- Adding on-demand amenities
- Improving the landscaping
- Installing new flooring
- Adding new appliances
- Painting the interior or exterior walls of the property
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On the other hand, you may have a hard time convincing a tenant of a rent raise if you have neglected repairs. You may even be lucky if the tenant considers renewing their lease for another term. Nothing frustrates quality tenants more than an unresponsive landlord.
Notify the Tenant of the Upcoming Rent Hike
After deciding on the rent hike, move to the next step and notify the tenant. Give the tenant ample time before their lease expires and it's time to collect rent.
Some states with rent increase laws specify the exact notice landlords must give tenants before raising rent.
However, others like North Carolina, with no rent control laws, don’t specify. This is one more reason why you should specify the rent increase details in your lease to avoid potential confusion or misunderstanding.
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Bottom Line
Raising the rental price can surely be an uncomfortable experience for a landlord, especially when you have a good tenant. But sometimes it’s necessary for an optimal ROI. If you’re planning to raise it, make sure to keep these tips in mind for a favorable outcome.
Do you own a rental property in Wake County, NC? Schambs Property Management can help you handle all your landlording responsibilities. Including, helping you raise rent successfully!