If you are a rental property Owner at this point in time, you are part of a monumental shift in the market.
Between younger generations preferring renting to buying, along with the lingering ramifications of the housing crash, we’re seeing the strongest stretch of rental growth since the 1980s.
What may be a Renter’s worst nightmare is a Landlord’s dream come true.
Rising demand for units + low inventory = Increased rent rates.
According to CNBC, rents are at the top of the list for fastest rising consumer prices and there’s no sign of this trend slowing down.
If you subscribe to this blog, you know that rents in Indianapolis are definitely on the rise as well.
You may have some reservations about raising your rental prices. You might be worried that raising rents will increase vacancy or scare off good tenants, or maybe you just really hate confrontation. These are legitimate concerns that deserve further discussion.
You have to keep in mind that while your property is someone’s home, it’s also a business and an income generating investment and you need to treat it accordingly.
While you may not be able to raise rent every year for the rest of your investment career, for the time being, we're in an environment that's certainly conducive to increasing rent rates.
When Should or Can I Raise Rent?
Ideally, you want to try and raise rent every year or in some cases, at the end of a lease - whichever comes first. You may have some long-term leases (2 or more years) in which case you wouldn’t be able to raise the rent until the agreement was up, unless you've made other arrangements within the lease agreement.
However, it’s not the best idea to raise rent in the middle of a lease even if the agreement allows for it. Doing so could put your Tenant in a constant state of unrest, never knowing when the next rent increase may hit.
When SHOULDN’T I Raise Rent?
While there are many reasons to increase your rents, there are also reasons NOT to.
Raising rent rates on your properties should not be the result of an unfavorable revenue year.
You may have taken a kick in the pants on some maintenance issues such as an HVAC replacement or having to install a new roof and think that raising the rent is a good way to help make up for it.
Maybe you had something unexpected happen in your personal life that put you in a tight spot and now you want to start charging an extra hundred dollars a month to help out.
Those are NOT good reasons to raise rent.
The only factor you should be considering when determining rent rates is the current market and what other, similar properties are renting for.
Any Tenant with common sense will understand basic economics and that prices for things generally go up, but I don’t think it would sit too well with them if they knew their rent was going up $100 a month because you had to buy a new HVAC for another one of your properties.
Renters will shop around and once they see that your property is more expensive than other comparable homes, they may very well decide to move.
Raising rents “just because” is how you scare away potential Tenants and increase vacancy time.
How Much Should I Raise Rent By?
To answer this question, you need to look at the market. It really comes in handy to have a Property Manager or Realtor who can help you out with this. There are also several publications released each year such as RentRange that explain what’s going on in the rental market and can be very helpful for understanding what you should be charging and why.
Being aware of current market trends is how you’ll know what the best price to charge is.
Keeping up with market trends is crucial to the success of your investment on multiple levels. Increasing rent little by little every year is a much better strategy than keeping it at its current rate for a few years and then having to raise it significantly out of nowhere.
This is where you run into issues with losing Tenants. You think you’re doing them a favor by not increasing the rent, but eventually you won’t have a choice and they are going to be a LOT more upset by a $200 hike than $25 year by year.
If you’re super concerned about vacancy, determine the amount you could raise your rent by, and then - perhaps - charge a little less. That way, when renters are shopping around, your property will seem like the best deal.
In our case, we use a 5% increase as a baseline for increasing rents for our Owners. In every case, we conduct a market analysis of the home and, recently, we've found that 5% increases is usually justified. That’s not always doable, but Indianapolis is seeing tremendous growth and even though it’s highly competitive, Investors are still buying up properties.
Should I Raise Rent on Good Tenants?
The issue of raising rent becomes a lot more delicate when you factor in great Tenants who are already occupying the property.
This topic is highly debated among property Owners and you can probably find an equal number of opinions for both sides of the argument. Many say that it’s not worth losing good Tenants, but many say that it’s absolutely necessary.
Some arguments against raising rent include:
- Prolonged vacancy
- Turnover costs
- Losing good Tenants
With that being said, if you approach it the right way, you have a good chance of successfully increasing rent AND keeping your Tenants.
Below are some good tips on how to increase rent the right way:
- Increase rent incrementally - If you provide good service, especially with maintenance processes, and take care of your Tenants, it’s highly unlikely that they will leave over a $25-$50 rent increase. Moving is expensive and time consuming. Raising rent in small amounts over time rather than large amounts all at once is one of the best ways to combat Tenant objections.
- Provide notice in advance - Indiana requires that you give Tenants a rent increase notice 30 days before the end of the lease term. However, we suggest negotiating a rent increase as much as 60 or even 90 days before the lease expires. This will only make you look better in the Tenant’s eyes and provide plenty of time to hammer out the terms of the renewal.
- State rent increase terms in the lease - For extended and month-to-month leases, include a clause that gives you the option to raise rent at the end of each term. This not only protects you as a Landlord, but also ensures the Tenant isn't blindsided when the time comes to increase rent.
If they are aware of the potential change in rent from the get go, they may be more apt to adjust their budget and stay in your property.
- Be willing to negotiate - If you have the opportunity to keep good Tenants in your property for an extended lease, you should absolutely do so.
In our experience, especially when working with multi-year leases, we add verbiage into the lease stating rent will increase the second year. We do this often at renewal when a Tenant is wanting to keep the rental amount the same and the Owner does not. We can often get both parties to agree to keep rent the same for the 1st year and then increase it the second year or spread the increase out over 2 years. This way, you can be secure in knowing that the home will be occupied for the next 2 years and the Tenant feels like you are willing to work with them.
We recommend that Owners be willing to work with Tenants when it comes to any type of negotiation.
Indiana Rent Control Laws
As you may already know, Indiana is generally a Landlord friendly state. The laws in place for property Owners are fair and give you a lot of freedom to make your own decisions.
There are no stipulations on how much you can or can't raise the rent by - it's solely up to your discretion.
As mentioned earlier, the only thing really required is that you give Tenants notice 30 days prior to the end of their lease agreement to let them know that rent will be increasing for the next lease term. They will then have the option to renew or vacate.
How a Property Manager Helps You Raise Rent
One of the benefits of using a Property Management company is that you don’t have to have any interaction with the renters occupying the home. In the case of rent increases, a PM would facilitate the entire process, negotiate on your behalf, and advise you on the best course of action.
This can make the situation a lot less awkward and overwhelming since you don’t personally have to be involved.
Another benefit of using a PM is that they should have access to the MLS system which provides the most up-to-date and accurate market rent rates.
Overall, utilizing a Property Manager can take a lot of the guesswork and anxiousness out of the process.