Are you looking for a better return on investment (ROI) from your rental property? One of the best ways to do this is by increasing your rental rates, which also keeps your property in line with the current local rental market rates.
However, you must be tactful on how you carry out such a price increase to prevent backlash from your tenants or guests and avoid losing them. Turnovers can be costly, so you should keep them at a minimum.
With that said, you should know how to increase rent fairly with the use of a yearly rental increase calculator, what the legal limitations are, and how to properly put the increase into effect.
Can a landlord increase rent? By how much?
Of course, you are entitled to increase your rental rates, but only when the current lease agreement expires. And, there isn’t a specific limit to how much your new rates will be. Without the law, you can (in theory) double or even triple your rates.
However, this is unlikely, since you want your property to remain competitive with other rentals in your area. Plus, increasing your rent by a big margin would reduce the pool of tenants or guests who can afford your unit. While you need to achieve the highest possible income, you still need to maintain a competitive rate to get more bookings.
Most consumers are looking for options that offer them the best value for money. So, find out what is the standard increase in rent in your area and set a fair new price to keep your occupancy rate high.
One more thing to remember is that some cities have rent stabilization or rent control laws that limit your ability to raise your rates above a specified amount. This helps prevent the typical city-dweller or holidaymaker in a region from being charged way over their spending capacity.
Why should you increase your rental rate?
To ensure that your property is profitable, you need to keep up with the expenses and maintain positive cash flow. When calculating the potential rent increase, consider the following expenses:
- Utility costs
- Property management fees
- Maintenance and repairs
- Property taxes
- Homeowners Association (HOA) dues
Can you raise rent retroactively?
Providing tenants with a rent increase notice that is already effective the previous month is illegal. However, if you provide proper notice of an increase and a tenant does not comply with it, he or she is under legal obligations to pay the balance.
Can rent increase affect the tenant’s security deposit?
Yes, increasing the rent affects the security deposit.
While the amount of security deposit varies depending on various factors, it’s typically equivalent to one month’s rent. And when rates increase, the security deposit also increases.
Some tenants may request to have their security deposit stay at the current amount, and some landlords consider the trade-off, especially when they’re dealing with favorable long-term tenants. However, if the property has sustained significant damage and there are lease agreement violations, landlords might not consider this compromise.
When is a landlord not allowed to increase the rent?
A critical component of running a successful rental property business is maintaining a competitive rate using the average rental increase percentage. However, there are some circumstances that can prevent you from increasing the rent, such as:
- When it’s before the end of the current lease contract
- When you do not provide a rent increase notice properly
- When the increase is likely to be construed as retaliation
- When you’re looking to move the tenant off your property by force
- When the lease agreement doesn’t provide a provision for rent increases
- When your property is in a rent-controlled area
- When increasing the rent is part of discrimination against certain tenants as described by the Fair Housing Act
- When you’re trying to increase the rent by more than what’s allowed by local laws
How do you calculate CPI rental increase?
The Consumer Price Index (CPI) is a measurement of the cost of living in a country. Each month, it groups consumer goods and utilities of the same type in the same market basket and determines whether their prices go up or down. If the prices keep increasing over eight months, this is known as inflation. When prices are going down, on the other hand, this shows that the economy is experiencing deflation.
The government needs the CPI to increase the benefits it pays out in a fair manner. As a rental property owner, you can use the CPI to increase rental rates that are based on inflation figures.
Choosing the right index
Rent review clauses include a statement that requires rental prices to increase on a specific date each year based on the CPI over the Base Index. The latter index is the previously published CPI figure before the commencement of the lease.
Make note that indices are published based on different categories, such as:
- Consumer type
- Goods in the basket
The “All Items Consumer Price Index for All Urban Consumers” index is the best to use in your yearly rent increase calculator and is often in the media. You can also use a different index depending on your location.
Running a CPI calculation requires:
- Rental prices tenants are paying
- Last CPI figure that was published before the rent increase date
- Last CPI figure from the lease date or base date
The rental lease provides a reference of the fixed base date like the start date or date of the last rent increase you have put into effect. The BLS Consumer Price Index website also provides figures for the current and historic CPI figures.
Finding the index adjustment multiplier
The change between the current index and base index date is the Index Adjustment Multiplier.
Index Adjustment Multiplier = (Current Index minus Base Index) divided by Base Index
For instance, if the last CPI figure published before the lease date (base index) is 192.9, and the CPI before the review date (current index) is 202.1, you get:
(202.1 – 192.9) / 192.9 = 0.048
The figure 0.048 or 4.8 percent is the effective inflation rate or price increase of goods since the signing of the lease.
Calculating the new rent
Once you have the adjustment multiplier, multiply the figure by your current rental rate.
Rent Increase = Annual Rent multiplied by Index Adjustment Multiplier
If the annual rent is $10,000, then
$10,000 x 0.048 = $480
This means that the rent increase is $480, increasing the new rent you enter in the cash flow calculator rental tool $10,480 to find next year’s projected income.
When should a rental increase notice be issued?
A rental or a lease agreement is a legally binding document whose terms can only be changed when you and your tenant agree to sign a new agreement.
Specifically, if you have month-to-month lease agreements, then you cannot raise the rent until the end of the month when the agreement expires.
In many states, the landlord should give tenants at least 30 days before enforcing a rent increase. However, some states, such as California, require that you give at least a 60-day notice if you are increasing the rent by over 10 percent of the current rate.
A thorough understanding of local and state laws regarding rent increases is critical. It helps you get properly prepared for the next step.
If you have a “tenant-at-will,” which means there is no specific written lease agreement, you are still not allowed to implement sudden rent increases. For the sake of courtesy, you should give the tenant ample time to get notified about the change.
How to inform the tenant you are raising the rent
Professional and clear communication goes a long way toward reducing conflict with tenants over rent increases, and a written note is the best way to do it. Also, such a letter should be a requirement in your lease agreement and by law.
While sending a rental increase notice, you should:
- Include all the necessary information to reduce confusion over a rent increase, and when it takes effect.
- Reference to how much each tenant pays and when will they start paying it.
- Make sure you write the notice in concise language, so there will be “little to no” room for negotiation or argument.
You can also use the rental increase notice to provide reminders about the payment policies and late fees. Check with your lease agreement and local law to ensure that all content in the notice complies with the requirements.
How to handle the backlash
Once you have served the rent increase notice, prepare to address negative feedback from tenants who may feel they have a legitimate reason against your action.
Make sure that:
- You are matching current market prices
- You mention any new amenities you have introduced into the property
- You explain any plans you have for updating the property
A good practice to follow as a landlord is to gradually implement a small rental increase percentage into each new lease agreement. This ensures that you are consistently following market trends without overburdening tenants with an enormous change to the payment rates.
No tenant is happy about having to pay more for rent. However, knowing how to increase the rates in a fair and structured way using a yearly rent increase calculator makes the process almost painless.
Overall, implementing a yearly rent increase is a delicate dance. But the result is higher rents and long-term lease agreements—the perfect recipe for a higher return on investment and successful business.
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