Automatic rent increases built into the lease to offset inflation

[Pavel Bennett]

Hi folks,

I think it is suboptimal that we price our rentals in a currency that continues to lose a lot of its value. I'm sure that approaching your tenants to tell them that their rent is going up is highly unpleasant because it makes you look like you're demanding more, when in reality, the tenant has unknowingly been paying you less and less, and for the most part, you would like to continue being paid the same in real terms as you were before.

As a possible solution to tenants being shocked by a 20% increase all at once after a year of significant inflation caused in part by Jay Powell's printing press, has anyone considered creating a simple formula that takes your estimate of inflation for the next year and gradually increases the rent every month (or quarter) to avoid large percentage changes all at once?

Example 1: Automatic increase of $75 every quarter. Note: Over time, fixed dollar increases will likely fall behind the market, but they are simpler for the tenant.

Example 2: Automatic increase of (15%/12) = 1.25% each month.

Example 3: Pick some public index (e.g. average rents for 1 bedroom units in your area) and see how far apart your unit should be from it. Fix that delta (as a %) and calculate a new rent price every month. In some cases, the tenant would actually see a decrease on a month-to-month basis.

Then, re-visit it periodically to see if any changes are needed.

I am considering offering this to a tenant who was surprised by a big jump all at once, but I'm wondering if there are issues with this that I may be overlooking. Are there some legal challenges with it?

It's more complicated for the tenant, but for predictable rents (examples 1 and 2), I could provide them with a table of rent due dates and amounts for the next 12 months so they can look up how much to pay each time without having to do the math.