How to Raise Rents Without Sacrificing Tenants

For some landlords, this is a sensitive subject.  For others, it’s a no-brainer.   Below you will find why it’s OK to raise rents and how often we do so, why to keep rents slightly below market rate, and the exact wording we use when communicating a rental increase to our tenants. You’ll find yourself feeling more secure by following these tips on why and how to raise rents without sacrificing tenants.

How Often Should Rent Increases Occur?

If you have tenants who have signed a lease for one year or more, you should increase the rent with every lease renewal OR write annual increases into a long-term lease.  Why? The longer you go without raising rent, the harder it is to do any increase that makes a difference on your bottom line.  For month-to-month renters, aim to raise rents at least once a year.  Even monthly rental agreements have an end date (or should), so do an increase at the end of that contract period when you offer the renewal.

Additionally, smaller increases each year are easier for the tenant to stomach over one colossal jump in rent after a long period of time.  Consistent incremental increases prepare the tenant to expect their rent to go up with each lease renewal.  If they do not know any different, your chance of them exiting diminishes greatly whereas, if their rent remains the same for several years and then BAM! You slap a $400 raise in rent, leaving the tenant scrambling to decide if they can or want to afford that new payment each month.  Psychologically, you might have guilty feelings for not doing any increases for several years and then being “selfish” enough to demand one out of nowhere.  Get over that. You’ll be happy you did.  Here’s what happened to us:

We fell victim to this guilt and are still paying for it to this day.

We have a tenant in a two-bedroom apartment who’s perfect (and still is).  He pays rent on time, handles most issues on his own, addresses and reports issues promptly when we need to manage them, and is a great neighbor to all the other tenants in the building.  He has been a tenant for over nine years, and we had only given him minor increases ($25-$40) each year.

Here’s how that came to bite us in the butt:  In 2020, the state of California passed a low-level law of rent control called AB1482.  This law states landlords of multifamily units not newly constructed in the last 15 years cannot increase rent more than 5% + CPI (or 10%) twice annually(overall increase cannot exceed 10% in a twelve month period). In addition, California landlords cannot evict unless there is just cause like a severe lease violation or a family member were to move into the unit.

Because rents had significantly increased in our area, our rate for that one unit was nearly $350 below the market rate.  Luckily, we are on top of the rents in all other units. However, we did begin raising rents annually and will continue to do so (with lease renewals) for the maximum allowed to get closer to the market rate.

Why does this story matter?

Even if you live in a pro-landlord state and rent control may never be an issue, having rents severely behind market rate can kill your bottom line in the event of lost rent on other units.  What if you have a long eviction process and go months without earning rent on one rental?  Can your other rental properties make up the difference and keep you afloat?  What if you have a severe flood from a broken water line or fire damage to several units?  Oh, you have Cap Ex savings? Great!  But those funds only go so far.  The pandemic is a perfect example!

It’s disturbing to look back now and realize how much money we had lost those last five years by not giving proper increases.  Those funds could have made a difference when all the appliances decided to start going out at the same time around June 2020.  Had we learned how to raise rent without sacrificing that tenant, we would be in a much better financial position right now.

Times are changing, and so are property and income taxes, insurance rates, and laws/ordinances around owning rental properties.   By staying on top of rental increases for all your units, you can cushion your bottom line and have the confidence to cover any increased cost of living and unexpected additional expenses that come your way.

Final Thoughts On Why Increasing Rents Is A Good Thing For Tenants

Should you be very financially secure on your property, you can use the funds to add or improve upgrades.  A few years ago, we had a very plain back patio behind our multi-family complex.  One season we added some new patio furniture so the tenants had private outdoor space to sit alone or with others.  Once we saw that the space was being used, we decided to add lighting so the space could be enjoyed at night.  The next year we added a dining table and chairs.  This addition was very helpful during the pandemic as the tenants had outdoor space to work at.  Finally, last year we added an electric grill (no fire hazard since no flames).  The tenants use this grill more than anything else!  You see, tenants likely won’t see their increases as a problem when you are improving their living experience by adding amenities.

Why We Keep Rents Just Below Market Rate

When we determine the rent for either a renewal or when marketing to a vacant unit, we generally keep our rates around 3% below the market rate.  Our reasoning is twofold:

• When we renew a lease, we know that our tenants are likely to search the area to see if they can find a better place for similar rent. They likely will not be able to.  We know that our units are clean, well taken care of, and offer amenities many other rentals in our area do not.  Other apartments or homes are much older and do not offer an in-unit washer and dryer or central air conditioning.  Brand new units which do have better amenities charge hundreds if not thousands more than we do.  So, by keeping our rates competitive, it lowers the chance of a tenant moving out.
• What if you need to sell your rental property? Having rents way below the market rate can severely affect your sales price.   Investors who want turnkey properties will pass on your building because making the numbers work will be too much effort for them.  Those who are willing to do the work likely submit a lowball offer to your sales price.  We see this as a significant issue in many rent-controlled areas.  We will see a 4-plex that comes up a third to 50% less than all the others around it and wonder what’s wrong with it? Oh, the rental rates are the same as those from 1995!

How We Address Our Tenants When Renewing A Lease (and Raising Rent)

Sixty days before each lease renewal, we will email either offering to renew their lease under specific terms or not renew their lease and state why (usually unit refurbishment or lease violations). It’s rare when we do not renew a lease.

For renewals, the email will read like this:

Hi “tenant name”,
We are contacting you today to let you know your lease is expiring in 60 days. However, we are happy to renew your lease under these terms:
Renew one year lease $xxxx
Switch to a month to month rental agreement: $xxxx (usually slightly higher rate)

The comps in the area for an x bed and x bath unit (which include an in-unit washer/dryer and central AC) come in between $xxxx and $xxxx.

We tend to keep our rents just slightly below the market rate to remain competitive.

Where rent increases are disappointing, we must stay ahead of increasing costs like insurance and property taxes as business owners.

Be assured that we are consistently evaluating how we can use these increases to maintain the unit and offer better amenities to improve your living experience.

Moving can be costly and time-consuming, so please consider that when contemplating our increase.

We enjoy having you as a tenant and hope that you decide to stay.

If not, please give us the required 30-day notice by (date).

Fondly,

Your Landlord

As you can see, we keep it short and professional.  We acknowledge we’d like the tenant to stay and do not show any emotion.  Remind them of amenities they have (and may have trouble finding in other units in the area), so they remember to look for those when searching for comps.  We also make sure to note what a hassle it is to move.  They will need to weigh the trouble of coming up with another security deposit before receiving yours back, the time to pack and move all their belongings, clean your unit, and return it to the shape it was delivered to them in.  Often, for the increased rent per month, it is not worth it.

If you really want to entice them to stay, check out our blog post Offering Tenants Incentives Upon Lease Renewal.

A Landlords Mindset

If you’re a landlord with an attitude of:

• “I prefer my tenants leave me alone.”

OR

• “I choose not to renew my leases, rather just let them fall into a month-to-month rental agreement and hope for the best.”

You need to change your way of thinking or stop being a self-managing landlord. Landlords need to manage their rentals with a proactive mindset.   Those were days when a 2-page lease that stated the rental rate, when it was due, and where to send it sufficed. However, with laws and ordinances changing often, it is essential to ensure your lease is clear, concise, and updated with every renewal. 

Need a state specific lease?  Check out EZ Landlord Forms for all your lease and landlord forms needs!  For a limited time, use our special code for 15% OFF YOUR FIRST FORM OR A LIFETIME SUBSCRIPTION!  This includes their lifetime forms offer!  Enter code: STACIE15 at checkout.

Additional Thoughts

While having non-bothersome tenants is a dream, consider if you will, they may just be throwing a bucket under the sink to avoid calling you about a leak, fearsome their rent will go up.   My aunt used to try to fix everything herself because her belief was “if I have as little interaction with the landlord as possible, they will not increase my rent.”  Back in 1980, she was right!

Nowadays, THAT tenant who does repairs on their own and the landlord who does not inspect semi-annually is just a disaster waiting to happen.  Unless that tenant is an appliance repair person or has adequate knowledge to repair plumbing, request they leave it to the professionals.   Let them know upon move-in that you WANT them to notify you about issues that occur.  This demand shows them you are a responsible landlord who cares about your unit and their living experience.  Also, advise them of their responsibilities to handle on their own like burnt-out light bulbs, batteries in smoke detectors, etc.  If you do not want to do these tasks, question if being a self-managing landlord is for you.  You may be better off hiring a property manager.  Click here to download our 6-Page Periodic Inspection Checklist for a single family home.

Consider This…

A 5% increase per unit over 5 years can mean additional thousands of dollars in your pocket each year.  Let’s say you have 5 units renting at $1,000 per month.  If you raise each unit 5% that’s an additional $50 per unit, or $250 per month.  Now take that out a year and you just earned an additional $3,000.  If you continued to add that same 5% increase without adding any new properties, after 5 years you will have earned roughly $48,000 additional income. That 5% continues to compound year after year. We are talking real money here!

One thing that landlords need to remember is, if you are a responsible and respectable landlord who takes the necessary time to select great tenants, they will likely stay with you until they have a significant change in their life.  In our experience, most tenants move out due to job relocation, moving in with a significant other (and need more space), or buying their own home.  Good tenants will find value in your unit if you run your rental property business properly.  You will rarely have an issue with a tenant if you are firm but fair and kind while providing a positive living experience for them.

We hope you find this guide on how to raise rents without sacrificing a good tenant helpful in your landlord journey.  We started Your Landlord Resource for this reason!

Check out our other blogs to guide you on your self-management journey as a landlord:

A Landlord’s Guide To Fire Safety In Rental Properties

10 Tips for DIY Landlords

Landlord Inspections are Essential

Security Deposits: 5 Tips Landlords Should Know

Marketing Your Rental Property, Get to Know the Neighborhood

Tips for Taking Great Rental Property Photos 

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