Every landlord faces the challenge of balancing rent increases with the need to keep up with inflation. But raising the rent often causes discomfort. Here’s how to do it with minimal stress.
I recently experienced a surprise $200 automatic rental increase from my latest tenants. It was a result of an annual agreement I’d forgotten about. They pay electronically on the first of each month, and I was initially unsure what to charge for my newly remodeled single-family home in San Francisco. I settled on $8,500 after scanning the local market.
The remodeling included expanding the ground floor from 300 to 600 square feet and upgrading the home with high-quality finishes. Before this, I charged $6,800 for the top two floors.
The Rent Negotiation
I accepted an offer of $8,000 from a family of three, as they were a good fit. This was still $1,200 more than I previously charged, providing a 12% return on the cost of remodeling, exceeding the historical average of the S&P 500.
However, I found raising rent uncomfortable, especially on good tenants. So, I made a counter-offer, setting a graduated increase over five years, which would save them $13,200 from my initial ask. This created an incentive structure to encourage them to stay long-term. They accepted, and I was pleased with what seemed like responsible tenants.
The Beauty Of An Automatic Rent Increase Clause In The Lease
Mom-and-pop landlords like myself sometimes fail to maximize profits due to the human nature of avoiding rent increases. In the long run, this may severely reduce returns, especially if tenants stay longer than economically optimal without rent increases.
Embedding an automatic rent increase schedule in the lease helps avoid any awkwardness when it’s time to raise the rent. It’s a win-win situation, setting expectations like a prenuptial agreement.
When To Use The Automatic Rent Increase Clause
Landlords should always include this clause, either as low as one percent or as much as the law allows. The market will ultimately determine if the conditions are attractive. The clause can also be used as a compromise during initial negotiations, as I found with my own property.
Check Your City’s Lease Laws
Different cities have different laws, so always check your local regulations. In San Francisco, for example, leases are only good for one year.
A Good Relationship Between Landlord And Tenant Is Everything
Being a landlord is like a part-time job. Finding the right tenant requires careful screening, but it pays off in the long run.
Take time to make every agreement in writing to avoid conflicts. An example from my experience involves the maintenance of yards. The tenants failed to uphold their part, leading to dead plants. Though I believed it was their responsibility, I paid to remove them to avoid conflict. Such expenses underscore the importance of automatic rent increase clauses.
Low Turnover Might Mean You’re A Bad Landlord
While reviewing my rental portfolio in San Francisco, I realized that I hadn’t had a vacancy in over five years. It seemed like a win initially, but I then realized that I charged below market rent. Costs such as property taxes, insurance, maintenance, materials, and labor were all increasing, but I absorbed the costs for continuity and harmony.
Going forward, I will include an automatic rental increase schedule in future leases. It offers rental visibility for prospective tenants, and I can cover rising costs without having to notify them of an increase. It’s a practical solution for a common landlord challenge.
