Making a profit from a rental property and keeping it leased is a delicate art.
A few property owners settle for charging less than other rental properties in their area and rarely raise the charges. Such landlords experience less tenant turnover, but they are not making a good profit from their properties.
Conversely, raising the rent might meet with resistance from current tenants, and the latter may find a new rental.
If striking the balance is a struggle for you, implementing an average rental increase percentage annually is what you need.
However, to do this, you need to research the current rental property market rate trends.
Average Rental Income Data in the US
Have you looked at the rental research data lately?
One of the smartest things you can do as a property owner is to stay informed. Understanding your tenants, their background, the rental market, and what other landlords are doing helps you make the best decisions.
Looking at the average rental income data may mean the difference between setting your rent too high and understanding the fair market value so you can set your rates accordingly.
Data from 2018 helps you stay on top of housing trends as demographics and economics change. Paying attention to rental rates and occupancy rates can help you come up with a marketing strategy that makes sure your properties are profitable.
Keep in mind that rental property ownership is forever changing, which can influence your success in the industry.
The statistics also reveal intriguing tidbits about the housing market and the economy.
Whichever way you look at it, looking at the rental property data in the US equips you with the power to make the best decision when raising the rent.
What Is the Typical or Standard Commercial Rent Increase Percentage?
Most times, the average annual rent on a property increases by three to five percent, depending on inflation.
However, the exact amount by which you can increase the rent depends on your city.
For instance, a landlord in Los Angeles can only increase the rent by providing a 30-day notice if the increase is 10 percent or less, and a 60-day notice for increases higher than 10 percent. Such local and state laws give the renter time to find an alternative rental property before implementing a new rental agreement.
If you own a rent-controlled property or one in a city with rent control, there are restrictions on how you can increase rent. The only way to find out about any rent control laws is by looking it up.
What Is a Good Income-to-Rent Ratio?
The income to rent ratio is a standard you may have in place that requires a renter to earn a sufficient income to cover the rent. Depending on where your property is, the property type you own, and your rental strategy, income requirements can vary.
For example, if the requirement is 30 percent of income for rent, and the rate is $1,200 a month, the tenant should earn at least $48,000 annually.
Instead of using percentages, an integer can sound more meaningful to the mind. In the example above, you could require the renter to earn at least three times (3x) their monthly rent.
The lower the monthly rent is as a percentage of the tenant’s gross monthly income, the more likely you will get paid on time and in full.
Unfortunately, many rental property investors often overlook the income data for residents when carrying out a background check. Tracking the data and maintaining it on file is critical, as it informs you of the maximum rent you can charge on the property.
To calculate the right income ratio for your property, compare the median property income to the average rent.
Median property income divided by Average rent = Income ratio
If a property has a required monthly income of 3x the rent, you should be thrilled as it provides you with room to raise the rent. Having this figure reassures you that future rental increases you may implement will not burden your current tenant base.
Calculating the Average Rental Increase Percentage
When purchasing a rental property, you must understand how to calculate the rent increase properly.
Reviewing the property’s rental history guarantees your return on investment (ROI) while making sure that past rent increases were lawfully done. Below are three strategies to help you.
Calculate change percentage between two rents
Getting the percentage increase means figuring out the change between the old and new rent.
Start by taking the dollar difference.
New rent minus Old rent = Difference monthly amount
Next, divide the figure by the original rent.
Difference monthly amount divided by Old rent = Increase ratio
Multiply the increase ratio by 100.
Increase ratio multiplied by 100 = Rent change percent
If the last figure is negative, it means that property rent has decreased.
Calculating new rent after effecting percent increase
Now that you have an increase percentage per year, it is time to determine actual rent prices in the coming years.
Calculate the new rent by multiplying the original rent by the amount of increase to get a dollar figure. Next, add the dollar change to the original rent.
Rent change percent divided by 100 = Increase ratio
Current rent multiplied by Increase ratio = Rent change in dollars
Current rent added to Rent change in dollars = New rent in dollars
How Should You Implement a Rent Increase and Avoid Backlash from Guests or Tenants?
If you are worried about how to raise the rent on tenants, read on to see whether you should and, if so, how to manage the process.
Step 1: Consider your reasons
As the landlord, you must keep up with your property’s expenses and maintain a positive cash flow.
One of the novel concepts to increasing profits from a rental property is by raising the rent regularly. If this is the option for you, consider how much you spend in the following areas:
- Utility costs
- Insurance premium
- Cost-of-living expenses
- Property taxes
- Home Owners’ Association (HOA) dues
- Property management costs
- Your property maintenance costs
Consider these expenses when factoring rent costs during lease renewals and tenant turnovers, so you are sure you are charging enough to turn a profit.
Step 2: Calculate the rent raise figure
The rental market can vary dramatically, so watch rental rates in your neighborhoods as you consider an increase.
Your goal is to make sure that your property stays competitive with market rents while experiencing little tenant turnover. However, the amount you increase the rent by depends on:
- The local limits and rent control regulations
- How your property compares with similar others within your area
- Sustaining enough cash flow but making a profit with the current market rates
Step 3: The best time to raise the rent
Make sure you send out a notice at least 30 days before the lease is up. Sending the letter in advance gets your tenant thinking about their plans early. Use this opportunity to provide incentives for them to renew the lease early.
For example, you might make a three percent increase if the tenant renews a month before their lease ends, and five percent if they wait until the last day.
Such incentives keep tenants motivated, and they are less likely to complain about the increase.
Step 4: Draft your notice
Use professional and clear communication to reduce conflict.
Your lease agreement or local laws may require that you inform the tenant of the rent increase by written communication. While drafting the notice:
- Cover all critical information so there is no room for confusion about the amount and date of implementation
- Show how much the tenant has been paying and from when
- Information should be as concise as possible to reduce chances of negotiations or arguments
Use the rent increase notice to provide reminders of late fees and payment policies. Plus, check the local regulations and your lease to make sure that the notice complies with relevant requirements.
How to reduce complaints
A happy tenant is less likely to complain about a reasonable rent increase percentage.
Some might have received a cost-of-living wage change and understand that expenses to run your property have gone up. However, if they are not happy, here are a few tips to handle some of the most common tenant complaints:
Why? Explain to a tenant your expenses are higher and cite some examples above. You can also mention the new amenities you installed the previous years or improvements you want to make.
The increase is too much Show the tenant the market rate. The research you carried out earlier lets you know the range of rent on properties like yours. If your rent price is below or close to the average prices, tenants will feel like it is a good deal and be less likely to complain.
Before you raise the rent, you will want to carry out research and find out the average rental increase percentage in the US and your neighborhood. Make increases more predictable and more palatable by including specific advance notice requirements into your lease. While no tenant will be happy about paying more, you will get fewer complaints by doing it in a fair and structured manner.
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