When Should a Rental Property Owner Raise the Rent?
December 9, 2022 / by Hignell Property Management Team
Rent increases are inevitable in both a resident’s and a property owner’s life. Rental prices are market-dependent – they ebb and flow in reaction and direction to economic conditions and trends. And while the recent rental market has been steadily driving rental prices upwards – across the board, a property owner still needs to understand that rents that exceed market conditions may be counterproductive as they will needlessly lose residents and cause costly turnover rates.
While a rental property owner has the right to raise the rent, they are required to increase the rent in a way that complies with relevant rules and regulations regarding the requirements to give notice and when a raise in rent is allowed. The rules that apply to rental increases will depend on several factors, and the first is whether the rental unit falls into the category of being ‘rent controlled.’
What is rent control?
Rent control laws, which may be known as rent stabilization, vary by state. States with rent control laws set forth restrictions and limits regarding –
- The amount of rent that may be increased.
- When rent can be increased.
- Situations in which a property owner may terminate a month-to-month lease.
- Situations in which a property owner has the option not to renew a lease.
Rent control laws are often complex, depending on the state where the rental is located. These rules generally are written to either a) protects only the current resident (a.k.a. vacancy decontrol) and b) regulate long-term rates that protect new residents (a.k.a. vacancy control).
In areas without rent control, there is no limit on the amount a property owner can increase one’s yearly or monthly rent.
With rents rising dramatically, state and local lawmakers have begun to enact legislation across states regarding the control of rental increases. For example, California’s 2019 resident Protection Act, which took effect 1/1/2020, limits the amount a property owner can raise the rent, although not every property falls under the auspices of this law. Note, however, there may be local rent control laws that impose different or additional property owner-to-resident notice requirements.
Exemptions to the Resident Protection Act
The California rent control rules exemptions include single-family homes/condos that are not owned by a Real Estate Investment Trust (REIT) or a corporation. In addition, the resident Protection Act of 2019 has no application to owner-occupied multiple-family homes, hotels, dorms, and mobile homes, to name a few.
property owners who rent properties that are exempt from rent control can raise monthly rents as much as they wish if there are no other local laws that must be obeyed. But each rental property owner is required to provide notice of their exemption status to their residents so they are aware of this fact.
When can a property owner raise the rent?
With a lease
When residents sign a lease for the unit they are renting, this written agreement usually (but not always!) prohibits a property owner from raising the rent during the lease term. When the lease ends, property owners offer their residents a new lease with updated terms – which may include a rent increase, among other changes.
With month-to-month agreement
By contrast, those residents who rent with a month-to-month rental agreement must receive a written notice from the property owner to raise the rent – because there is no protection offered by a signed lease agreement. The advanced notice ranges from 15 to 60 days, depending on a) the state or local laws and b) if the property is required to follow rental control laws.
Why would a property owner increase monthly rents?
property owners typically increase rents for their investment units:
- To keep pace with current market conditions.
- To fund property improvements/maintenance.
- To accommodate increases in property taxes or insurance expenses.
- To generate additional profits.
The effect of rent increase on a resident’s security deposit
Rental price increases often trigger an increase in a resident’s security deposit.
The security deposit, which is a dollar amount typically equal to one- or two-months’ rent, is held in escrow/trust by the property owner. Its purpose is to cover potential damages to the rental unit caused by the resident that are considered beyond “normal wear and tear.” The security deposit, which is usually capped by local or state limits, cushions what could be a significant financial blow if:
- The resident skips town before the end of the lease term.
- The resident violates the lease terms.
- The resident damages the property during their tenancy, and this may include cleaning, back rent, or the replacement of unreturned keys.
As noted above, security deposits – which are paid upfront, are typically equal to one- or two-months’ rent, although they may be higher in certain circumstances.
For example, in California, security deposits for unfurnished residential properties may be equal to two months of rent. If the unit is rented furnished, the security deposit may be equal to up to three months' rent.
The following example clarifies what happens to the security deposit when a property owner raises the rent -
If the rent has been raised legally, a resident will likely have to increase their existing security deposit proportionately. The current monthly rent is $1,500. At the end of the lease, a new lease is for a monthly rent of $1,650. How will the security deposit be impacted?
- First, calculate how much the rent has been raised. ($1,650 - $1,500 = $150)
- Then, divide the increase by the existing monthly rent. ($150/$1,500 = 10%)
The existing security deposit of $3,000 (equivalent to two times the monthly rent) will be increased by 10% or $300.
Property owners with investment properties that fall under rent control regulations must comply with state regulations that dictate the timing and way rental increases are communicated. Rental increases for exempt properties have no restrictions; however, property owners are required to disclose this fact in writing to the resident.
Navigating rental property ownership can be overwhelming and challenging to understand. Hiring a professional property management company to help can keep you compliant and let your rental properties work for you while you take back your weekends.
Topics: Residential Property Management, Rental Property Tips, Investment Property