“How are we gonna pay next year’s rent?!”
Raising Rent During Renewal
It is that time of the year again; a tenant’s lease is about to expire and you’ll be meeting with them to talk about renewal. You have gone ahead and sent them a notice about lease renewal through a letter or email. The big question on their mind is: how much will the rent be increased per month if they renew?
You have priced the increase to be about 16% and you’re hoping they’re fine with it; you may have detailed reasons why the rate is going up. It is logical and reasonable to assume the cost will increase due to increases in costs and management. Then tenants demand explanations, don’t accept your reasoning, and maybe give notice that they’ll be vacating the unit. Heck, maybe they just give you notice and decided to leave without voicing their opinions. Regardless, you are now looking at another tenant turnover and while you may have expected these situations to arise, you also thought the increase wouldn’t be so much as to cause a tenant to immediately move out.
The thing is, if the amount exceeded around $100, regardless of the percentage rate logistics, the increase most likely priced that tenant out of their previously affordable home. That 16% increase mentioned above likely spells tenant turnover for any rent amount over $600. If the lease agreement was a fixed-term, by law you must give them time before the notice to look for another apartment. An over 10% increase of rent would require a 60 day notice. Under 10% or a month-to-month lease agreement would only require you to give 30 days. You would also need to add 5 more days to the notice if you’re sending it through first-class mail. However, it is easier to have it delivered via email or on the door. Also take note if you live in LA; the Rent Stabilization Ordinance will typically limit raising rent prices to 3% of the current rent.
So then how do we reduce tenant turnover? While the obvious answer is “don’t raise your tenants’ rent,” property managers also have the right to make more money. Being a landlord is a business, after all, and even if you find the operating costs haven’t gone up to necessitate a raise in rent in a lucky year, it will happen down the road. The key then is raising rent to an amount that will keep tenants more willing to stay.
Some things you can try are:
- Know your competition. Use free resources like Zillow and PropStream to compare the market rent on other apartments. Use them to help calculate a percentage rate for the increase. If you’re willing to pay a little bit of money, you can also try using Cozy which has a few more features in helping you determine an estimate.
- Raise rent prices every year, even if it’s a minuscule amount. If a tenant is used to seeing an increase of $10-$20 each renewal, they’re more accepting of it. This is also a good way of calculating where you’d like their rent to be in the long term to make it match market value: if you want rent to be raised from $1000 to $1100, a tenant will be more receptive to two years of a $50 increase than an immediate jump to $100 in one year.
- Percentage wise, try not to raise the rent by more than 5%, and DO NOT exceed 10%. If possible, consider cutting your tenants’ actual percentage down from what an industry standard would and show them in the lease agreement. This shows them that you’re valuable to them and appreciate their business and residence.
- Raising rent is a delicate process, but planning ahead and using small incremental increases rather than a huge spike in prices will work out better for your property by keeping those units full of tenants. Remember that typically tenants will expect the rent to be raised, and most likely aren’t against the idea itself. If they’re planning on staying for the long haul, they’ve most likely starting planning their finances around a yearly increase, so why not think about it actively too?