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4 Best Justifications To Include In A Rent Increase Letter
Some landlords welcome the thought of rent increase as the expiry of the existing lease agreement approaches. While others secretly loathe the sound of it even though renewal is more of a formality.
Because when it’s time to increase the rent, it often puts you in an awkward situation with a tenant you have always maintained a friendly relationship with. And because of the familiarity between you, something inside you does not 100% support a rental increase.
This is often due to:
- You are afraid that you might be viewed as a greedy pig
- You will not really incur substantial higher costs of owning the house
- The tenant is not doing extremely well for himself financially
- You are raising rents for the sake of industry practice
- More miscellaneous stuff
If you are having these unhealthy thoughts in your head, do pinch yourself and acknowledge that you are into real estate for returns and retirement. You are not running a charitable organisation here.
And do you think the tenant will contemplate giving you an extra payment whenever he receives his annual bonus? Not in a million years.
So it is fully within your right to raise rent when the opportunity arises. You personal income is on the line here.
If the act of being a “bad” landlord does indeed disturb you, do the following to lighten the blow to your self-image.
Put it into the agreement
Include a term in the tenancy agreement that rental will increase a certain percentage (maybe 5%) each year. You can then include a clause within the term that you have the authority to waive or reduce the 5% should some standards are met. The standards will be determined by you.
By making rental increase a frequent event, you will face less resistance when making your move each time. On top of that, it makes your generosity to reduce or remove it a more powerful act of good will.
Send a notice
Very often it is not the prospect of rent increase that is shocking. It is the sudden timing of it that knocks the senses out of your tenants.
You can prevent this sudden blow by giving them a notice. Usually 60 to 90 days is more than sufficient to provide ample warning.
Be familiar with the law in your area
Certain territories have rent control laws that you might break for playing around with the numbers. Definitely get yourself acquainted with your local regulations before making your move.
The last thing you want is a tenant to counter-strike your rent increase letter with a letter from the authorities.
Find out the market rates
Being victimised can arouse very powerful feelings of resentment. And having to pay above what the market is paying can ignite that fire within a tenant.
So don’t make the grand mistake of quoting a premium price above what is available in the market. It would be a different story if you have an exclusive or premium property. But if your is just a typical fixer-upper, don’t attempt to bite off more than you can chew.
Now that you know the basic ways to prevent an angry confrontation with your tenants, let’s go into some of the reasons you can include in your letter template so as to justify an increase in rent.
If you were to force a decision down someone’s throat, you could be faced with strong resistance. However, if you provide reasons for your decision, more often than not, people will accept it even when the reasons make no sense from their point of view.
This is why you need justification for your rental movements. Here are some of the proven ones.
1) Increase in taxes
The best part of this reason is that everyone is powerless to stop it. If the IRS decides to raise property tax, every homeowner will simply have to comply. No amount of negotiation or argument will make a material impact on the outcome.
Reason like these where legislative changes are involved usually encounter the least resistance from tenants.
Remember to list them down so that readers can see how big a blow you are taking as a landlord… you poor thing…
2) Higher maintenance and expenses
After legislative reasons, the next best reasons are those that are caused by the market.
This is when inflation is your best friend. Inflation has cause your costs to spiral out of control.
There are the cost of:
- Raw materials
The list might never end if you put your mind into it. The point you are trying to make here is that there are a lot of extra expenses that you will incur or already incurring.
And for this reason, you cannot afford not to raise rentals.
3) Increase in interest rates
The mortgage is the single biggest cash flow item that is bleeding your bank account dry. And the rising interest rates are really taking a toll on your cash flow. At the rate interest rates are rising these days, you might not even be able to repay the monthly instalments with rental.
The odds are that your tenants will be experiencing the effects of rising interest rates too. They have their own credit cards, time deposits, etc. So they might actually be able to empathise with the challenges you are facing.
And… interest rate hikes are out of your control. It’s the fault of the monetary policies… not yours…
4) Increase in insurance costs
If I am able to choose 1 business to get into and be guaranteed success, it is the business of insurance.
This is one of those businesses where consumers have no idea how prices are calculated, but still pay whatever premium an insurer quotes just for peace of mind. And even if you are shown how they are calculated, the variables will consist of figures that are self-declared and seld-formulated.
Insurance is a weird exotic world.
The irony is that as a landlord, you will be buying the types of insurance that tenants have never heard of. And they can often accept that you have higher premiums to pay year after year.
And that justifies a rent increase.
You don’t need to explain your numbers to anyone other than the IRS. What you are trying to achieve here is provide reasons for rental increases so that tenants will be more accepting of them. Tenants are usually understanding as long as you are not trying to pull a fast one.