Is it ethical to increase rent during times of high inflation?
In the United States, inflation has usually averaged two to five percent annually. As a landlord, inflation affects you in multiple ways: your grounds maintenance costs and costs of repairs and renovations go up every year. Property taxes, landlord insurance premiums, and broker fees to find new tenants are all subject to that same pressure. Inflation not only increases costs, but it also devalues profits. There is nothing unethical or illegal about raising your rents to cover these and other increased costs. Most tenants understand and accept this customary practice.
In times of high inflation, however, when your tenants are experiencing the effects of less buying power everywhere in their lives, passing to them the entirety of your own inflationary burden may not be practical. This is in part because housing is possibly already a significant expense for them. Housing costs are about one-third of many people's budgets, so cost increases there take a bigger bite than they do in other categories.
The key to keeping your tenants, and to keeping them as happy as possible in difficult inflationary times, is to have a plan to encourage them to stay with you and to implement that plan in your lease documents. Smaller annual rent increases, rather than a single large one when inflation spikes, can keep you in step with average inflation rates, and may make it easier for your tenants to keep up.
How can a Lease Agreement help with rent increases?
One way you can prepare for the effects of extraordinary inflation is through your Lease Agreement. Month-to-month and shorter fixed term leases may provide you with the flexibility to raise the rent when renewing the lease. This strategy, however, allows your tenants more flexibility to move out.
With your Lease Agreement, disclosures, and welcome documents, you may want to provide a letter that explains how much state or local laws allow you to increase the rent every year, and how often tenants can expect those rent increases. This can be good for both new and existing tenants alike. It offers them certainty and predictability and can make your rent increase seem moderate compared to high inflation.
What do state and local laws have to say about raising rent?
State, county, and local laws can limit your ability to raise rent. These include rent stabilization ordinances and state and local laws that require minimum notifications to all tenants (including month-to-month tenants) for rent increases. If you are in an area with strong renter protections, you may want to talk to a lawyer before you notify your tenants of the increase.
For a long-term lease, it may not be possible to change the rent until the term expires, or the lease comes up for renewal. If a tenant agrees, however, you may be able to amend the lease to raise the rent at any time.
How much can I raise the rent?
How much to raise your rent is a three-way balancing act. You want to know:
- How much is required to maintain profitability.
- Your tenants' ability and willingness to absorb a rent increase.
- Legal requirements or constraints.
The ideal outcome of this balancing act is to keep good tenants for longer periods while receiving enough additional rental income from them over time to cover your increasing expenses.
Exactly how much to raise rent varies for each landlord's unique situation. The following steps can help you with the other two balancing considerations:
- Check your state and local landlord-tenant laws. Do they restrict your ability to increase rents? How much advance notice does state or local law require you to give? Is your property governed by any state or local rent control or stabilization laws?
- Once you know how laws may apply, check the competitiveness of your rental property in your market:
- How much overall demand for rentals is there? The bigger the disparity between home seekers and rental availability, the more negotiating leverage you have with new tenants and renewing ones.
- How do rents compare to mortgage payments? As mortgage rates and downpayment requirements increase, more people may be forced to seek a rental option instead of buying a house. This can increase demand.
- How much are your own costs increasing? Look at your maintenance costs, property taxes, utility costs, and landlord insurance premiums.
- What are your competitors charging? What is the state or national average for rental properties like yours?
- Next, consider your current tenants and their ability to pay rent now. Do you already have tenants who are behind? Are any having trouble paying on the due date? The more tenants who are having present trouble paying, the more cautious you may want to be in any planned rent increase.
How can I make sure rent increases do not lead to problems with tenants?
Up to now we have covered financial and legal items to think about when you decide how much to increase rent. But passing inflationary costs is not only an exercise in dollar calculations or contracts. Your tenants are human beings, and they respond better when they feel they are appreciated as long-term tenants. Here are some additional strategies to consider to help soften the blow of a rent increase:
- Encourage your existing tenants to stay by moderating their rent increases over time. Steady yet manageable rent increases for long-term tenants may be more profitable than a higher increase that leads to vacancies or payment problems.
- Let tenants know why you are raising the rent. The better they understand that you are responding to inflation like they do, the more likely they will consider staying instead of moving. You can use a Rent Increase Letter to make this task easier.
- If possible, make some renovations or add some amenities or other improvements to the property. This can show tenants that their rent increase is benefiting them in a visible way.
- If you must make a significant rent increase — more than the average of about three percent per year — you may want to consider staggering the increase over several months. For example, if the goal is to increase the rent by $100 per month, allow your tenant to only pay $50 more for the first three to six months.
It can be helpful to learn all that you can about the process of raising your tenants' rent before moving forward with an increase.
If you have more questions about how or when to increase rents, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.