Increasing rent on a tenant is never an easy thing to do. This is especially true if you have a loyal and reliable tenant. But what are you to do if your property costs increase and/or the area begins to boom, leading to fewer profits?
Before increasing rent on a tenant, it’s important to weigh certain factors. Such factors include current rental market prices, vacancy rates, and how dependable your tenant is with paying rent.
To help with the process, it is a good idea to work with a good property management company in San Diego. North County Property Group has provided the following tips on when it is justified to consider a rent increase and how to raise your tenants’ rent without losing them!
1. Make Rent Increases Be Part of the Lease
Have a clause in your lease on rent increases. If your tenant knows they can expect their rent to increase every year, for example, then they will not be surprised when the rent increases.
In your lease, remember to include as much information about the increase as possible, like when tenants should expect it and what percentage the rent increase will be.
As a side note, don’t forget to include information on what a tenant must do before moving out. That is, the notice period they must provide if they are not looking to renew their lease.
A notice period should give you ample time to market the property to prospective tenants should they reject the increased rent. However, mentioning rent increases in the lease itself will greatly reduce this risk.
2. Make All Necessary Property Improvements
Have you made significant upgrades to your rental property? If you have, this can be a good reason to adjust your rental price to reflect the upgrades.
On the other hand, you may not have any justification to increase rent if you’ve not been staying on top of your tenant’s maintenance needs.
Generally, rent increases can go smoothly when tenants get more incentives from landlords. The incentive can be in terms of upgrading dated appliances or making other updates to the property.
Your tenant may also have no problem with a rent increase if you give them some flexibility. Do you accept pets, for instance? If you don’t, you may want to reconsider that if you are looking to make more from your property. Just make sure you have a pet policy in place to protect your investment from any potential damage.
3. Understand Your Local Rental Laws
Know what your local laws say regarding increasing rent. California is one of the few states in the country with a rent increase law in place. Rent control laws usually have restrictions on the amount of rent increase a landlord can make in a year.
The AB 1482 is a statewide rent control law that was passed by Governor Newsom on January 1st, 2020. It allows most residential property owners to have a 5 percent annual rent increase, plus the price of inflation, as determined by the Consumer Price Index. The total should not exceed 10%.
So, suppose you charge a monthly rate of $2,000 for your San Diego rental property. In such a case, the highest you can increase the rent by is $200 ($2,000 x 0.10 = $200). That would now bring the new rent to $2,200. Additionally, you cannot increase the rental rate more than once over a 12-month period.
AB 1482 does make some exemptions to certain types of properties, including owner-occupied homes, dormitories for higher education institutions, and transient and hotel occupancy.
This is the practice of raising the rent on the price of goods and services higher than the fair market value.
For example, back in 2018, the state of California passed the AB 1919. According to the bill, raising rent by more than 10% during an emergency would amount to a misdemeanor. Such emergency situations include things like fires, floods, and earthquakes. An eviction during a state of emergency would also be a misdemeanor, especially if you re-rent the unit at a higher rate.
Two years later, SB 1196 was passed to expand upon the AB 1919. The bill now includes pandemics and disease in its list of emergency declarations. In addition, it also extended the emergency order beyond the 30 days previously outlined under the AB 1919 legislation.
To summarize, these laws mean that there is a cap on how much rent you can charge your San Diego tenants. So, be wary of increasing your tenant’s rent any time soon, as the emergency order is still in effect in California.
4. Determine How Much to Increase the Rent
Just because the law allows you to increase rent to a maximum of 10% doesn’t mean you should go the whole length. You should consider a few factors before doing this.
First, find out the market rate. Conduct some research on how much landlords in the area are charging for similar units. If similar units are going for $2,000, then it wouldn’t make sense to charge an extra $200 on top. North County Property Group provides a free service on its website where you can enter your property’s address and obtain free rental analysis to find out what your property should rent for. Here is the link to that tool so you can try it yourself: https://www.ncpropertygroup.com/property-management-services
Second, factor in the vacancy rates. Go around the neighborhood and check how many similar units are vacant. If there are many, then hiking up your rent would only make things difficult for you.
To sum up, just because you can raise rent doesn’t mean you should. You should research and make sure it’s reasonable before going ahead with it.
5. Let Your Tenant Know Beforehand
It’s always good to give tenants a heads-up for any notable change. Since you’ll be making a change in the terms of the lease agreement, you’ll need to notify them beforehand. You should do so between 45 and 60 days before the end of the lease.
Increasing rent on your tenant is something that’s inevitable in any landlord’s career. But the goal should be to ensure you do it right. Consider all factors and abide by state and local laws. If you find the process daunting, North County Property Group can help! Contact us today to learn more about our San Diego property management services.