As the cost of maintaining your rental property rises over time, you may need to raise the rent you charge. But before you raise the rent, you will need to take several things into consideration.
First, do your tenants have a clause in their lease that ensures the rent will not be raised during the course of the term of the lease? If your lease agreement contains this clause, you will not be able to raise the rent amount for your property until the period of the lease has elapsed. This is also a concern for new landlords that have taken over ownership of existing rental property. You must honor the terms of the lease for your new tenants, even if the rent amount does not cover your expenses.
When the lease is up for renewal, you can try to negotiate a rental increase with your tenants. Some of them may be willing to pay more, but be prepared for some percentage of tenants to balk at the increase and maybe even move out. Be prepared for this eventuality by advertising to fill any vacancies.
You will need to provide your existing tenants with enough notice that a rent increase will be forthcoming. This usually means a 30-day notice, but may differ according to state or local law.
Some states and many cities have enacted rent-control measures to prevent landlords from overcharging their tenants. If your state or city has a rent-control law, you are limited in the amount of rent you may legally charge your tenants. Before getting embroiled in a legal battle, make sure that you are complying with all applicable rent-control laws.
You will also need to make sure that the local housing market will support your demands. Research other rental properties in your area before making your decision. If the majority of the properties are charging much less for rent, you probably will not be able to attract new tenants — or even retain your existing tenants.
Gradual rent increases generally go over better than large one-time increases. For example, you may need to raise the rent $100 per month to make a profit. However, a $100-a-month jump may frighten your existing tenants and keep new tenants away. Instead, try raising the rent just $25 per month for the first six months, and then another $25 for the remaining six months of the year. This may help reduce your vacancy rate and maintain your property’s profitability.
Do not be afraid to negotiate with a good tenant if they cannot meet your new rent amount. Good tenants can be hard to find, and you should be willing to bend a little to keep them. You may be able to trade services for the rental increase amount, such as lawn care or odd jobs on the property.
If you do decide to make an exception for a good tenant, you may open yourself up to accusations of favoritism. To protect yourself from such claims, document what the tenant has promised to do in exchange for a decrease in rent.
If your tenant does offer to provide services in exchange for a decrease in rent, make sure that they actually do provide the services. If you are an absentee landlord, this can be difficult to follow up on, and your tenant may be counting on this. Take the time to check on their work before letting them slide on their rent responsibilities.
Landlords that do allow a trade of services for rent must still need to claim the entire amount of the rent as income on their tax returns. For example, if you charge $500 a month in rent, but your tenant pays only $450 and mows the lawn, you must claim the entire $500 amount as income since you are receiving a service in exchange for that $50. But, you should be able to deduct the $50 as a property expense. Check with your tax advisor to clear up any tax issues before taking this step.