Raising Rent without Risking Losing Valuable Tenants

Raising rent is a touchy subject. On July 31st, 2021, the eviction moratorium and rent freeze ended in the United States. The pandemic hurt the economy and made the subject of raising rent uncomfortable.

Good tenants are hard to come by. When we have good tenants, it's tough to raise the rent. After all, you want to keep them happy, and vacancies can be costly. However, if rental market rates increase and you don't raise the rent, you reduce your net income every year.

As real estate investors, we may need to raise rent to:

• Meet current market rates. 
• Fund maintenance and improvements to the property.
• Pay property tax increases. 

As the pandemic showed us, unexpected financial trouble can happen to anyone at any time. Want to make sure your real estate investing business is protected? Start with our investor quiz, and we'll help you find ways to protect your assets.

Rules of Raising Rent

Local landlord-tenant statutes govern the process of raising the rent. In general, you can increase the rent when:

• You are renewing a lease.
• You give at least thirty days' written notice.
• Your tenants are on month-to-month leases.

Make sure that you know your state's laws. You can look them up here. Navigating the legalese of the statutes is frustrating.

A qualified real estate attorney understands the nuances of landlord-tenant law and can explain the rules as they apply to your specific investments.

Circumstances When Raising Rent is Not Allowed

The market sets the rent price, and as a savvy investor, you want to manage your investment successfully by keeping up with market trends. In 2021, the national median rent rose by more than 11 percent. However, there are times when you are not allowed to increase rent.

When you CANNOT raise rent:

• during the lease
• failure to notify your tenant of the rent increase
• rent-controlled property
• retribution against your renter

It might be the case where you are within your rights to raise the rent, but the amount you can increase the lease may be controlled by:

• Section 8 
• Fair Housing Act
• Local laws and ordinances

Three Tips for Raising Rent Without Losing Tenants

What follows is good advice for raising rent without losing tenants. After all, a vacancy can be expensive. On average, tenant turnover will cost you $1,750 per month.

Here are the three tips about how to raise rents without losing tenants:

• Increase rent every year. 
• Raise rent reasonably.
• Soften the paint of a steep rent increase. 

Every year, you should increase the rent a bit.

If you wait too long, you run the risk of letting the rent fall so far behind the market level that a raise to the average market level feels like a punishment or unreasonable. When that happens, the massive jump in price wrecks your tenant's budget.

That's a recipe for an unhappy tenant, and when your renter is sad, they are more likely to leave or enter into an adversarial relationship with you.

A better strategy is to raise the rent by a nominal amount each year. Typically, you can increase the rent from two to four percent per year, and the price will still be reasonable for your renters. Additionally, it will keep your investment property aligned with the market.

Regularly raising the rental price creates an expectation in your tenant. They come to expect the increase and prepare for the added cost of living.

To reiterate, raise rent reasonably.

Your tenants won't abandon you if you annually raise the rent by two to four percent. As you increase the percentage, your renters will start to weigh their options. Anything more than an eight percent increase will all but guarantee that you will lose your renters.

That's not to say that you should lose money on your investments, but a gradual increase in rent will keep your tenants happy and long term.

Soften the pain of a steep rent increase

Let's face it; sometimes, your capital expenditures are eating into your cash flow. Everything from your HVAC system to the roof is wearing out. At a minimum, you should be raising the rent to cover the cost of significant repairs.

Those extensive systems in the house don't cost anything month-to-month, so people sometimes forget about the cost. Then one day, the AC goes out, and you have to pay $3,500 to replace it. If the market is higher than your rent, you are losing money on the current value of your capital expenditures.

You might decide to increase rent to market levels immediately instead of incrementally. On average, people pay about $1400 rent per month in the United States. For illustrative purposes, your tenant pays $1200 in rent.

If they are a good tenant, offer them multiple options when it comes time to renew:

• Monthly at $1400
• Year-long lease for $1350 per month

In this scenario, the loss of income offsets the price of lost money to turnover. A long-term tenant drives down your turnover rate, and you get a guaranteed return on investment.

Three Things You Should Know About Raising Rent

#1 The eviction moratorium and associated rent freezes are ending. The market has increased, and it's time to bring rent in level with the market. 

#2 Make sure that you intimately understand landlord-tenant statutes, local, state, and federal. 

#3 Raise rent the right way to avoid losing tenants. 

Openness and communication go a long way with your tenants. Whenever you give notice, remain professional and friendly. You have no reason to argue with your tenants, so stay firm. While a vacancy is time-consuming and costly, so is moving.