At the onset of the pandemic, owners suffered from a loss of rental income due to widespread moratoriums and the delayed release of rental assistance. Since the lifting of moratoriums and other lockdown restrictions, the economy is slowly recovering, and the housing market is starting to heat up again.
Current conditions reveal an improved opportunity for property owners, however economic forces, such as inflation and a limited housing supply, have pushed the median monthly asking rent to over $2,000 in the US. Given these conditions, you might wonder if it’s the right time for a rent increase.
In this blog, we dive into how you can implement a rent increase and the specific regulations and laws you must keep in mind.
How much to increase rent per year
Increasing the rent price can seem like a daunting task, and you must be certain of the reasons why you’re doing it. It’s essential to keep in mind that this decision is often necessary to make up for any revenue you lost as part of running your business.
According to Avail’s Quarterly Landlord and Renter Survey, 45.8% of property owners expect to raise their rent prices anywhere between 5% to 10% within the year. Meanwhile, according to HouseCanary, rental rates in the market are rising at a 13.4% annual rate compared to 2021.
Though these numbers can serve as baselines, it’s essential to consider the following factors that should influence your raise:
Running a rental portfolio business is a reliable way to generate passive income. However, some operating expenses need to be covered to keep your rental units at par with other homes in the market. In most cases, a rent increase is usually necessary to prevent operating expenses from eating up your profit and bottom line.
Operating expenses can refer to anything that you need to keep your business afloat on a day-to-day basis. These can include taxes, insurance premiums, utilities, and vacancy allowances. If these expenses go up, a rent increase is needed to keep your revenue in check. In Avail’s survey, 41.4% of owners reported that increasing maintenance costs and property taxes affected their rent prices.
Specific market trends
How much to increase rent per year also depends on the current market prices in your area. Although most states are seeing higher rent prices, they’re not the same across the board.
For instance, rent increases have been significantly higher in states located along the Sun Belt. Before the pandemic, the cost of living in these areas was relatively cheaper compared to other regions. That’s completely changed ever since remote work became so prevalent. More households now have the flexibility to move to these warmer regions. Consequently, this influx of new renter households has caused rent prices in these areas to be relatively higher.
Work-from-home flexibility has also encouraged workers to move from city centers to cheaper suburbs. According to the real estate brokerage Redfin, the following metro areas saw the most substantial rent increases yearly.
It also helps to compare your current rent price with how much other property owners are charging in your area. This way, you’ll gain insight into whether or not you’re setting your price too low or too high. Poplar Homes’ offers a free rent estimate that shows you the appropriate price range for your unit based on similar homes in the area and current market trends.
While at the core of your decision to raise rent should be recovering from any income losses, it’s also important to remember that a steep rent hike might trigger a renter to end their lease. Strive to strike a balance between keeping your investment profitable without implementing a rent increase that will be too burdensome for your current residents.
Steps to take before implementing a rent increase
A rent increase is an inevitable part of running a rental portfolio business. To avoid upsetting any of your residents, it’s essential to provide enough notice and provide full transparency about your decisions.
Here’s what you need to do before making the rent increase official to avoid dealing with complaints or to prevent your renters from moving out:
Raise rent at the right time
Increasing your rent price at any time you wish directly violates regulations stated in landlord-tenant laws in most regions. Before deciding how much to increase rent per year, you should circle back to your lease or rental agreement.
If your residents signed a lease, this agreement usually covers a fixed rental period spanning 6 or 12 months. This means that you can’t legally raise the rent until the lease agreement expires. A month-to-month rental agreement usually allows for more flexibility which means you can raise the rent within a shorter period.
Notify residents in advance
It’s always beneficial to be transparent. In most states, you’re required by law to provide at least a 30-day notice before a rent increase takes full effect.
However, the number of days can vary depending on which state you’re residing in. For instance, in California, property owners must inform their renters 60 days in advance if the rent increase is more than 10%. The notice for a rent increase should also be written to ensure your residents are properly informed ahead of time.
Be wary of rent control laws in the area
Rent control laws regulate the amount of rent you can charge or by how much you can increase your current price. If you plan to raise the rent, it’s best to check if there are any existing rent control regulations governing your region.
According to research by the Urban Institute, most municipalities with regulations on rent control are located in Washington, New York, New Jersey, California, and Maryland. Meanwhile, Oregon’s state-wide rent control only allows a 9.2% annual rent increase for 2022.
It can be an appropriate time for property owners to implement rent increases with market prices on the rise in many regions across the US. However, raising the rent shouldn’t be solely based on a whim. Before implementing a rent increase, it’s essential to consider how much your unit is worth based on the numerous economic factors and market trends at play. Consequently, you should also be concerned about tenant turnover and take the necessary steps to remain compliant with landlord and tenant laws.