Since the start of 2020, rent has shot up by 8% across the US, a rate higher than any other 2-year span at the start of a decade. 2022 is no different as rent hikes remain strong with an average 3.7% monthly increase. As rent costs continue to soar, property owners ought to know how to negotiate rent increases.
As homeowners, it can be difficult to deliver bad news to your tenants, especially concerning finances. However, as the market goes up, so must your rental price.
One factor that has affected recent rent increases is the pandemic. During the early stages of COVID-19, many cities implemented rent increase limits or even price freezes. Now that these conditions are lifted, inflation is going up along with rent. So, to keep up with the market, homeowners have been forced to implement rent hikes.
With rent increases looking certain, property owners can use some tips on communicating with their renters about an impending rent hike. Simple miscommunication can lead to property turnover or vacancy, which costs more in maintenance, tenant screening, advertising, and turnover fees. So, it is better to understand the importance and master rent increase negotiation.
Why Should You Increase Rent?
In a post-pandemic world, the demand for rentals has significantly spiked. Residents are looking to head back to the suburbs as more companies support a work-from-home setup. Note also that the pandemic caused shortages of workers and materials, leading to many construction delays. These factors contributed to high demand but low supply, causing rent increases.
The demand for rentals is not the only factor that went up but also the fixed expenses on rental investments like property taxes. Mansion Global reported that many cities raised property tax rates this year to help fund infrastructure, administrative, and other funding gaps. This data alone gives a reason for owners to implement rent increases to keep up with the competitive market. In some cases, it may be the only option to ensure the survival of your investment.
Now, the important question is…
“Is it worth losing your tenant over a rent increase or better to keep the original rent price to extend their stay?”
During this challenging time, a rent hike is a necessity for the survival of your business. Keeping your original rates, in some cases, is not enough to cover the increase in maintenance and property tax rates. However, having an increase might drive your tenants away as they would be forced to allocate more of their monthly budget to rent alone. This could ultimately drive them to find a more affordable place to stay.
On the other hand, if you decide to delay the rent hike, the time will still come when you will be forced to do so. Knowing how to negotiate a rent increase through proper communication that allows both parties to share their thoughts is a great way to show that you are actually considering their living situation.
How to Negotiate Rent Increases
As a homeowner, there are certain things you can do before a negotiation. The aim is to relay your points effectively and hope it leads to an agreement between you and your tenant. The following are some leads on how to negotiate rent increases.
Send Out Early Notice
In most states, rental owners must provide at least a 30-day notice to renters with month-to-month contracts if they intend to raise rent costs. If tenants have longer lease agreements, homeowners should deliver the notice at least 60 days before it comes into effect.
This written notice serves as your compliance with the state laws. Also, this gives your tenants enough time to review the terms and allows them a chance to have a fair negotiation with you.
Make It Reasonable
Another good tip for negotiating a rent increase is doing your homework as the rental owner. Prep your key points on the reasons for the rent hike. Several factors may have influenced you to make such a decision, and you may want to jot them down so you can decide which information you wish to share with your tenants.
One factor you may note is the local real estate market. Checking out other similar properties in the area and their rent prices might help you elevate your case and justify the rent increase. Consider also using a free rent estimate online tool to aid you in determining your unit’s current value in the market.
Other factors include the following: (1) new employers’ arrival in the area opens job opportunities and increases rental home demand; (2) an “acceptable” location changing into a “desirable” one would surely cause a rent hike; (3) and lastly, property improvements you’ve made should also be noted and brought up during the discussion. It is advisable to list all these down and back your increase up with concrete reasons so it doesn’t appear as an impulsive decision.
Sit It Out and Hope for an Agreement
The intended purpose of negotiating is to conclude with an agreement. Yet, a settlement may not be reached right away. It is important to understand that, before finalizing a deal, both sides should compromise so having a fair amount of time to contemplate plays a key role here.
When both parties finally decide to shake hands on it, all agreements should be put into writing and should not violate any rent control ordinance. Remember that, although oral promises are legally binding, printing the complete rental agreement is still better to avoid future disputes.
However, when negotiations take a wrong turn, it is best to be prepared to deal with vacancy and turnover. Unfortunately, vacancies can last months, so it’s best to take advantage of the time to do maintenance work while you focus on finding your next tenant. Hiring a property manager is the fastest and easiest way to help fill the vacancy in dealing with unoccupied rentals.
The entire negotiating process can test the relationship between you and your tenant. Being considerate and patient during negotiations is highly advised. Remember that honesty and compassion are vital during rent increase discussions so try to observe these throughout the process.
For homeowners who intend to keep up with the fast-changing rental market, consider carefully the need to increase rent prices. During discussions, be as professional as possible while demonstrating empathy by considering your tenant’s situation. Once an agreement has been reached and signed, respect it and stick to the terms at all costs.