The Art of Raising Rent on Your Rental Properties
Plus Two Effective Strategies That Will Work With Your Tenants
Happy Thursday, fellow Hybrids!
In today’s newsletter, I will make the case for why landlords should raise their rents every year.
Plus, I’ll give you two effective strategies to handle those conversations with your tenants without causing drama.
Don’t worry. It’s not as bad as it sounds.
(Today’s issue takes ~4 minutes to read)
As a landlord, you may find yourself in a position where you need to raise rent on your rental properties.
In fact, I highly recommend you make small, incremental increases every year to keep pace with inflation.
While this can be a difficult decision, it's important to approach it strategically to ensure success for both you and your tenants.
Before we get to the strategies, here are 3 things you need to know:
1. Know the fair market rent of your property/unit
Research the rental market in your area. Look at comparable properties and see what they are charging for rent.
If you increase your rent too much, you may lose tenants to more affordable options.
On the other hand, if you're not charging enough, you're leaving money on the table.
2. Communicate with your tenants
Let your tenants know your plans in advance and provide reasoning behind the increase.
This can help in multiple ways:
Alleviate any confusion or frustration.
Gives an opportunity to negotiate with long-term tenants who have been paying on time and taking good care of the property.
3. Follow local laws and regulations
Each state and city has different rules about how much and how often landlords can raise rent. Make sure you know and follow these regulations to avoid legal issues.
Examples:
St. Paul, MN, has a strict 3% cap on annual rent increases, including when tenants move out!
The states I invest in (Washington, Nevada, Iowa) do not have rent control.
Of course, you can avoid steep rent increases by raising them incrementally every year to keep pace with inflation.
Either way, you’ll want to know what’s possible.
Resources:
Now for the fun stuff!
Two Effective Strategies For Raising Rent
#1. Use “The Binder” Strategy To Get Tenant Buy-In
In the popular YouTube channel Dion Talk Financial Freedom, Dion breaks down an approach called “The Binder” where the renter helps set their own rent.
Here’s how it works:
1) Create a binder with an overview of the property
This includes what you paid for it (public information), photos of the property, and a map of similar rental properties in the area.
2) One page for each nearby rental comp
Include photos to validate that the properties you're including are, in fact, comparable. List the rent amount prominently at the top of the page.
Use Rentometer to pull the average rent comps for your property:
3) Ask the tenants what they think is fair
"Based on this information, what do you think is a fair rent for this property?"
More often than not, the number they throw out will be higher than what you were originally planning on.
Resources:
Rentometer - Easiest site to pull rental comps & averages
Dealcheck.io - Build a page for your property and use RentCast rental comps (NOTE: You only need the free version to do this)
#2. Use “The 3 Options” Price Anchoring Strategy
Here’s a breakdown of my favorite script (typically sent 90 days out):
“Due to naturally increasing expenses, it is necessary to gradually increase rent over time. Therefore, a slight bump in your monthly rental rate will take place soon. However, we would like your input on where to go from here.”
Then give them 3 options:
Sign a new one-year lease at $__ per month (3% increase). This is an increase of $__ per month.
Sign a new six-month lease at $__ per month (5% increase). This is an increase of $__ per month.
Sign a month-to-month lease agreement at $__ per month (8% increase). This is an increase of $__ per month.
By doing this, they’ll see that the best option for them is to commit to a 12-month extension with a lower increase. Win-win.
Try the script. Send the template below to your tenants 90 days out and watch it work!
Resources:
Download this Lease Renewal Decision Form and fill it out for your property.
Success Stories
Natalie, one of my readers, had been having the same problem (below market rents for too long without raising the rent):
So she took my advice and had “the talk” with her tenants:
Not only did she successfully increase the rent, but she even worked with the tenant to complete a home improvement project.
Another friend from my weekly mastermind had a similar experience. He had “the talk” and gained $1,080 in additional annual income!
Conclusion
Raising rent is one of the less fun parts of being a landlord, but it’s a bad decision to stay flat on your rents-long term.
Use strategies like “The Binder” or the “The 3 Options” to keep rents rising at an appropriate rate while keeping the tenants happy.
I wish you the best of luck. See you next week.
-Aaron
PS: What do you think about raising rent every year? Do you agree or disagree? Reply and let me know.
Great post, Aaron. For our first ~20 years as landlords, my husband and I only raised rent between tenants, after someone moved out, and since some of our tenants stayed for many years, we left a lot of money on the table. When we decided to start catching up, we were left with a dilemma about how much to raise rent, especially since pandemic-era policies placed severe restrictions on rent increases in Washington state. I think including a lease clause about automatic modest annual increases is a great idea.
Regarding your 3 options, I would note that folks should be careful about month-to-month leases. We used to roll our tenants automatically to month-to-month status at the end of their lease term, but we've since learned that in Washington state, landlords have fewer options for ending a tenant's residence if the tenant is on month-to-month status. Now we require every tenant to be under lease at all times, though we are flexible about the lease duration.