How much to automatically increase rents every year?

Question

I have always kept rents the same with renewals, but with insurance and taxes increasing, I'm going to start adding automatic annual increases to my leases. What is a fair increase that will keep me and my guests happy (and in place as long as possible)?

My first thought was an automatic 2% increase every year, rounded to the nearest $10 for a 12-month lease, with 5% increase to go month to month. But when I put that on paper it feels gross and greedy, as inflation and annual raises are around 3%.

How much do you automatically increase *your* rents every year?

Matthew Crivelli · Answer

Why not take a case by case approach? You don't want to lose good tenant over $50 a month. If you cant cashflow, I understand raising rent but I'm not a fan of automatic increases. You will end up having more turn over, which leads to vacancies, which leads to less cashflow.

Drew Sygit · Answer

Over our 25 years of dealing with thousands of tenants, the biggest challenge with rent increases is tenants using every excuse they can to avoid them.

Our solution has been a lease clause that states the rent will automatically increase x% upon renewal, unless either party gives the other party proper notice 60-days prior to the end of the lease.

The goal of this clause is to force the tenant to the "bargaining table" or they get an automatic increase.

Other points:

1) We can still require MORE than the auto-increase amount if we inform the tenant 60-days before lease end.

2) We can also negotiate $0 or a smaller percentage than the auto-increase if market and other reasons influence the process.

3) Tenants on the other hand, procrastinate (they are tenants for a reason) and won't do anything and then protest they are being taken advantage of. - FYI our PM software automatically emails them reminders 90 & 70 Days before lease end covering all their options. So, tenants have ZERO logical excuses if they do not come to the "bargaining table".

John Kunick · Answer

@Jamie Warcken, I also live in Tulsa and own many properties.  I am NOT a fan of the automatic increase idea.  I do a case-by-case basis and determine rent on multiple variables such as my cost increases, desire to retain tenants, rents on nearby properties, etc..  I have NEVER lost a tenant I wanted to keep based on increasing rent.  IMO, the key is communication and including in that message empathy that, while nobody likes to see their rent increase, this is a normal part of me keeping the properties in good condition and being responsive with superior customer service.  For example, I just renewed a lease and explained the rent increase as "my costs of property insurance, taxes and repairs have increased by X per month but I'm only increasing the rent by half that amount as a reward for you being an excellent tenant".  I've also explained that if you were to leave, I could re-rent your property for X as that is what other comparable houses in the same neighborhood are currently renting for.Good luck with your decision!

Mackaylee Beach · Answer

Automatic lease increases are not always the best option. Evaluating each lease individually might prove to be a more effective strategy. Taking a personalized approach allows you to consider factors such as tenant satisfaction, market conditions, and property improvements. By assessing each situation on its own merits, you can foster stronger tenant relationships and potentially reduce turnover. Additionally, this method can lead to more tailored agreements that benefit both parties, ensuring a harmonious living environment and a well-maintained property.

John Morgan · Answer

It all depends for me. I keep them all in below market rent if they are good tenants. Some are $200/month below market rent because they’ve been there for years and never bother me. I usually bump it up $50-$75 every year. My taxes and insurance go up at least that amount or more so I pass it onto them. And if I’ve had a lot of maintenance or cap ex at a rental, I pass that off to them with rent hikes to pay for it. We’re not running charities, so we need to keep raising the rent to cover our expenses. And sometimes I tell my tenants my expenses between insurance and taxes went up $100 this year so I need to raise your rent $75 or whatever.

JJ P. · Answer

Apartments.com has a really good rental comp calculator that's free.  You can keep track of the local market and make sure that your prices are in the sweet spot.

Bill B. · Answer

So using your math, the tenants already owe you years of increased taxes and insurance costs. For the years you haven’t raised the rent. But here’s my thoughts.

1) You are probably paying to play property manager. Your property manager would probably charging enough extra rent to pay for their fees.

2) How much your costs go up don’t matter one bit to the tenant or how much rent you can charge. What if tomorrow your insurance and property tax’s went up $500/mo. Would you raise the rent $500? What’s the plan when the current tenants move out and nobody will move in at that new rate? Your costs don’t matter at all. Only your competitions price does.

3) If you refinance at a lower interest rate and your costs go down are you going to lower rent?

4) Imagine next week your local market institutes rent caps and you are stuck below market “forever”. With 2-5% rent increases base on rents that are 20-40% below market. (If you haven’t increased rents in years.)

Please reach out to a couple local PM’s. Ask them how much rent they would charge for your property and how much it would cost you I’m betting you’ll find you’ll make more with less work while the tenants receive better service.

Theresa Harris · Answer

Two options-increase your rent based on how much your expenses have increased (ie if your property taxes went up by $100-add that to their annual rent) or look at the rate of inflation.  Some of my rentals are in an area where there are caps on rent, so I increase the rent by the maximum amount allowed (last year it was 3.5%).  for me that worked out to about $50 depending on the rental.  That still doesn't keep up with market value.  I had a vacancy and the rent was $1600 (they'd been in there 4 years) and going to be $1650 at renewal, but they left and it was re-rented at $2000.

Corby Goade · Answer

We renew at whatever the market will allow- just because your own expenses are going up doesn't necessarily mean that the market will support it. Sometimes a renewal without an increase can be a big win, you have to know what's going on in your market and adjust accordingly.

How much to automatically increase rents every year?

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