In a time of historically high inflation, raising the rent is a necessity for landlords. Otherwise, you’ll lose money. And when you’re losing money, you’re essentially paying tenants to live on your property. No landlord wants that. So how much can you raise the rent?
There are both legal and economic issues to consider before raising the rent. You don’t want to raise the rent by so much that you’ll lose a good tenant. You may be ready to raise the rent, but your lease doesn’t allow for a rent increase until it expires. These are just a couple of considerations.
You may think that limitations on how much you can raise the rent is only for areas where rent control laws are in effect. That’s only in New York and some other big cities, right? Think again. There are some laws regulating rent increases in almost every state.
Here, we’ll discuss the economic considerations for when and how much to increase the rent. We’ll also look at where rent control laws are in effect and look at some other legal restrictions on your ability to raise rent.
The Three Factors That Determine How Much a Landlord Can Increase Rent
In most parts of the country, the answer to how much can a landlord raise rent is that they can raise it as much as they want. It’s your property. You can charge whatever you want. That’s free market capitalism. But the free market has its own type of restriction — if you raise the rent too much, you have no tenants and therefore, no rental income.
In 2022, the market very much favors landlords. If you live in an area with no restrictions on how much you can increase the rent, you’re in great shape. The inventory of homes for sale is low and the mortgage rates to buy a house are high. That means more people than usual can’t afford to purchase a home. Consequently, there’s a high supply of potential tenants in relation to the inventory of rental units.
To put this into perspective, in most parts of the country, landlords can name their price. But finding tenants and finding quality tenants are too different things. Consider the following example.
You have a tenant that has a stable job working at your local food stamp office. This tenant has lived on your property for over ten years. They’ve never been a day late on the rent. They can afford a 10% rent increase. But you find a prospective tenant that works remotely for a tech company that’s willing to pay 50% more than the current rent. You look at the tech worker’s background and see they have moved 10 times within the last 10 years.
Which tenant makes the most economic sense? Going into tough economic times, the food stamp office worker is extremely unlikely to be laid off. But, the tech worker will probably move within a year. There’s no right answer here. If you want a higher return on investment for more risk, go with the tech worker. Otherwise, negotiate with the food stamp worker.
What does your lease say? Most leases are for a term such as one year. Some leases are month to month. Residential term leases usually only allow rent increases at the end of the term. But if there’s nothing in your state’s landlord-tenant laws barring rent increases during the term, there’s nothing to stop you from specifying the right to increase rent during the term of the lease.
It’s probably a bad idea to raise rent before expiration of the lease when there’s nothing in the lease saying you have this right. Of course, when the lease expires, you can have the tenant sign a new lease with a provision allowing rent increases during the term of the lease. It’s best to check with a real estate attorney to see if it’s legal to put such a provision in a lease in the state/city where the rental property is located.
When there’s high inflation, it’s good to have the agility to increase the rent whenever needed to react to unexpected economic conditions.
Laws vary across the country. Your leases must be at least as good as local laws require. For example, if local law requires a 60-day written notice of any rent increase, a provision in your lease that says only a 30-day written notice is required is unenforceable. But, if your lease requires a 90-day written notice, since that’s better than local law requires, the tenant can enforce that provision against you.
Landlord-Tenant Laws That Affect Landlords Ability To Raise Rent
All levels of government have laws and regulations affecting the rent you can charge. You may have read in other articles that there’s no federal rent control. The fact is, in limited situations, there are federal laws that effectively provide rent control.
Federal Landlord-Tenant Issues
There are federal rent control laws relating to the Department of Housing and Urban Development’s (HUD) Section 8 Housing Program. This is an exception to the rule that the federal government isn’t involved in rent issues. But it’s not the only exception.
If a tenant files a complaint against you under the Fair Housing Act and you raise the rent shortly thereafter, you could have problems. In Montana, a landlord had a $37,000 verdict awarded against them for charging a disabled person $1,000 to keep their dog in a rental unit.
Some legal experts believe §70-24-431 of the Montana Code would bar rent increases for up to six months after filing a Fair Housing Act complaint regardless of whether the tenant wins. That might be true, but the Montana code doesn’t explicitly say this. What the Montana Code says is that a rent increase within six months of a tenant filing a safety complaint or joining a tenant’s union is a retaliatory rent increase.
As you can see, it’s important to be mindful of all laws (even federal laws) that affect your ability to increase rent.
State & Local Landlord-Tenant Laws
It isn’t only rent control you need to worry about when making a rent increase. You need to make sure there’s no bar on rent increases because of the COVID-19 emergency. At the time of this writing, in December 2022, there are still areas where COVID-19 emergency ordinances are in effect.
Even the most conservative states have laws requiring timely written notice of rent increases. Often, you must send written notice of the rent increase 30 days before it can take effect. But the required notice period varies by state.
State and Local Rent Control Laws
Rent control laws aren’t always easy to follow. Sometimes the laws are based on what a local board sets the maximum rent increase for. In other cases, lawmakers put the allowable annual increases into the state code or into local ordinances.
The National Multifamily Housing Council (NMHC) provides a great resource to determine if your property is in a rent-controlled area. But it’s only a starting point. For example, it shows that Minnesota state law preempts local governments from passing rent control ordinances. Yet, Minneapolis and St. Paul passed rent control ordinances. In such confusing cases, it’s a good idea to consult with a local attorney.
The Economics of Rent Control
For the last fifty years, state and local governments have been repealing rent control laws. States have even passed laws barring local governments from passing rent control laws. For this reason, it’s highly unlikely your property is subject to rent control. But, beware, rent control is making a comeback. And, learn your history. There was a time when over 80% of all rental units in America were subject to rent control.
Rent control peaks during emergency situations. For example, it was during World War II that rent control went over 80%. Similarly, during COVID-19, there was something akin to rent control in the emergency measures. Note that the COVID-19 measures were mostly short term.
During World War II, there were price controls on most goods and services. After the war, price controls ended almost everywhere — except for rent control. What’s different about rent? The difference is that housing costs are the largest expense for most American families.
Rent control had major economic problems. Landlords were less likely to renovate property if they couldn’t increase the rent. Developers were less likely to build new rental units where rent-controlled prices were below the market rate.
So rent control fell out of favor in most parts of the country. It only remained in places like New York and San Francisco. Without some regulation, only the wealthy could afford to live in those cities. Where rents were so high that many essential workers couldn’t afford to live, rent control remained.
New York City Rent Control Laws
Rent control ended in New York City in 1971. Except that anyone living in a rent-controlled apartment was still under rent control until they moved. Currently, only about 1% of New York rental units are rent-controlled — sort of. There’s a bit of a play on words here.
Rent control is where governments set hard limitations on how much landlords can increase rent. Rent stabilization is where governments allow rent increases within a specified percentage. Whenever a tenant moves out of a rent-controlled apartment in New York, it converts to a rent-stabilized apartment. Approximately 44% of rental units in New York are rent-stabilized. It’s just rent control by another name.
New State Laws That Put a Percentage Cap on Rent Increases
In 2019, Oregon became the first state to pass a statewide rent control law. It’s similar to New York’s rent stabilization rules because it limits rent increases by a percentage. The Oregon law forbids increases in rent that exceed 7% annually plus the change in the Consumer Price Index (CPI).
Not to be outdone by its neighbor to the north, California enacted a statewide rent control law a few months later. § 1947.12 of the California Civil Code limits annual rent increases to the CPI increase plus 5%. Unlike Oregon, California cities can still enact stronger rent control ordinances if they choose to. For example, the rent control ordinance in Santa Ana prohibits rent increases more than the regional CPI plus 3%.
On the surface, the rules seem reasonable. And to a degree, they are reasonable. They have a built-in feature to protect landlords from inflation — the CPI part of the formula.
But there’s a glaring weakness here. Inflation for all goods is not the same. For example, in June 2022, the Internation Air Transport Association (IATA) reported that the inflation rate for jet fuel was 128%. Whereas the average inflation rate among advanced economies was about 10%. In the US, the CPI is most closely associated with the concept of inflation. What if there were a price control on airline tickets tied to the CPI?
As you can see, if there was a price control on airline tickets similar to the CPI-connected rent controls for Oregon and California, it would force airlines to lose money as they wouldn’t be able to raise prices high enough to reach profitability.
Is there any expense that could exceed regular inflation for landlords? Both Oregon and California are prone to natural disasters — such as wildfires. Some insurance companies might raise their premiums at a rate higher than inflation. That’s a key reason you must go with a highly rated, affordable landlord insurance company that understands your situation.
As you can see, even the best intended laws can have unintended consequences. But the California and Oregon laws could work if amended to allow more flexibility. It’s important to consider how to draft rent control laws that take the landlord’s situation into account because rent control laws are once again on the rise across America.
States considering rent control measures include Massachusetts, Colorado, Washington, Minnesota, and Florida. Florida is more conservative than other states on this list. But Florida also has a high percentage of renters.
Wherever there are many renters and high rent prices, rent control could be on the way regardless of the current political party in power. The best way to slow the trend is to reduce inflation.
Know the laws that affect you before raising the rent. Your property is probably in an area with no restrictions, but it’s worth checking. If you have any doubt about whether you’re covered by rent control, it’s best to speak with an attorney or real estate expert.
Don’t put off raising the rent. Prices are rising for everyone and you’re no exception. Rent increases are a business decision like any other. Consider the economic impact and try to find a fair rate.
Of course, you always need the right landlord insurance on your rental units. Steadily is the best rated landlord insurance company in America. Get your quote on landlord insurance today.