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How and When to Raise Your Tenant's Rent 

The cost of living goes up each year in the majority of cases. For a landlord, a cost-of-living increase translates into higher property taxes, increased landlord insurance rates, and steeper HOA dues. Labor and material costs also increase with cost-of-living hikes, which means higher maintenance expenses for the property owner. These increased costs eat away at the landlord's profit margin, which means if the landlord does not increase the rent, he or she will make less each year. Decreased profits make for bad business and an unsustainable situation for the property owner. Eventually, the landlord will realize that he or she cannot sustain all of the expenses attached to the house without raising the rent. At that point, the rent will be so far below market value that a huge rate increase will be necessary to match the current market. However, a sizeable increase, such as a $100-$200 bump per month, is too much for most people to absorb. No matter how much a tenant loves your property, if he or she can no longer afford it, he or she will have to move. 

How to Properly Handle Rent Increases 

• Explain to your tenant at the onset of your relationship that you will be increasing his or her rent each year. This way, your tenant will expect an increase, and there will be no surprises, hurt feelings, or shock. Be courteous but firm. Let your tenant know why it is necessary to increase costs annually. Outline the amount your costs to own and maintain the property go up each year so the tenant understands you are not gouging him or her.  
• Establish a good relationship with your renter. Be warm and communicative. Make an effort to get to know your tenant and work to build a rapport. Call your tenant every so often to see how things are going. Ask about his or her kids by name. Inquire about his or her favorite hobbies and employment. Take and keep notes from your conversation, and save them for the next time you call.  
• Raise rent between 3-5 percent. Never exceed 10 percent, or you will most likely lose your renter (sparkrental.com).  
• Follow the law. Find out how many days' notice you are required to give your tenants in writing that you are raising their rates before they sign the new lease. Also, you can only increase the rent amount upon lease renewal; no rate changes can be made mid-contract.  

• Research the housing market in your area to make sure your rental rates are in line with everyone else's. If your rates are significantly higher, your tenants will likely leave to secure less expensive housing, and you will be left with a vacant property for which no one wants to pay above market value. If you are much below market value, you are not making the return on your investment that you could, and you are in danger of being so far below that it would be hard to catch up without over-inflating the rent.  
• Consider all the options. If your tenant has an issue with the rent increase, offer a two-year lease with a lower rent increase instead.  
• If you have an excellent tenant that you do not want to risk losing, think about holding off on raising your rental rates for a year or two to keep that tenant happy. Transitioning between one tenant to the next is expensive; you have to repaint, re-carpet, power wash, thoroughly clean, etc. And if your rental property does not get rented right away, you have the headache of lost revenue.  
• Be fair in your rental pricing. Never increase a tenant's rent out of spite or retaliation for something the tenant has done. Discriminatory behavior toward your tenant is illegal, and you can be sued.  

Weigh the pros and cons. Rental pricing is a delicate balance between covering your costs, building in a profit, and keeping your property occupied. As a general rule, raising your rent 3 to 5 percent each year is safest to maintain the pace of rising costs. However, there are always exceptions, and you have to consider the potential consequences of your tenant vacating if you do so. 

Sources: 

apartments.com 

millionacres.com 

sparkrental.com