The cost of living increases every year, but 2021 and 2022 saw exceptional increases due to heavy inflation and worldwide economic struggles caused by both the pandemic and the war between Russia and Ukraine. As a result, landlords may wish to increase their rental income accordingly in 2023 to cover additional expenses, but before doing so there are some important considerations to be made. And keep in mind that if the lease agreement is still in effect, raising the rent must be done in accordance with the terms of the lease and any applicable state and local laws.
What considerations should a landlord make before raising the rent?
While there are no federal laws regarding rent increases, there are several U.S states and municipalities that have rent control laws so this would be the first thing to check. If there are no local restrictions on raising the rent, a typical bench mark for rent increase would be anywhere around 2.5%-5%. Before raising the rent though, landlords should consider the following:
- The terms of the current lease. It's important to keep in mind that, if the lease agreement is still in effect, raising the rent must be done in accordance with the terms of the lease.
- The local rental market and comparable rental prices in the area.
- The condition and amenities of the rental property and any recent upgrades or improvements.
- The length of the tenant's current lease and their history as a tenant.
- The landlord's own expenses, such as property taxes and maintenance costs.
- The tenant's ability to pay the increased rent.
When can a landlord raise rent?
Most leases cover a period of one year, meaning landlords typically have an opportunity to raise rent once a year for each tenant. If there is no formal lease agreement or the tenant is leasing the unit on a month-to-month basis, the landlord may be able to raise rent at any time.
However, some states impose additional restrictions, such as rent increase notification laws. For example, landlords in Washington must provide written notice of any rent increase to each tenant at least 60 days in advance. States may also have rent control laws as well as temporary restrictions established in response to public emergencies. For example, in response to COVID-19, some states established eviction moratoriums that also said a landlord could not raise rent during the pandemic.
Can a landlord raise rent during a lease?
If there is a formal lease, the landlord must follow the terms of the lease as well as state rules. If you buy a property with existing tenants, state law may require you to honor the current lease. In most cases, the rent is set for the entire period of the lease, which means you cannot raise rent until the current lease expires.
How much is an acceptable rent increase?
When determining how much to charge, landlords need to consider both legal and economic factors. Federal, state, and local laws can limit rent hikes. The lease may also establish restrictions on rent hikes. Since the lease is a legal contract, landlords need to adhere to these terms.
Economic factors include those that impact the landlord, the tenant, and the market. For example, landlords may need to raise rent because their own insurance, maintenance, tax, and other overhead costs have increased and they risk losing money if they don’t charge more. Likewise, landlords may raise rent because the fair market value has increased and they want to charge what their unit is worth. A large hike, even if warranted, may cause tenants to leave in search of more affordable lodgings. If you need to find new tenants, list your unit on one of the top websites for rental listings.
Which states have rent control laws?
Some states and local governments have rent control laws that limit rent hikes. If you live in a locality without rent control, you may be able to raise rent however you deem appropriate. However, if you live in a jurisdiction with rent control, rent hikes may be restricted, often to a percentage of the rent. Cities and counties may have their own rent control, if permitted by the state.
According to the National Multifamily Housing Council, California and Oregon have statewide rent control and California also has city-specific laws. In Maryland, New Jersey, New York, Maine, and Minnesota, some cities and counties may have rent control laws.
The California Tenant Protection Act of 2019 (AB1482) went into effect in 2020. It limits annual rent increases to no more than 5% plus the local Consumer Price Index rate (which is a measure of inflation), with a cap of 10% total. The law also requires landlords to have “just cause” to evict a tenant. Individual cities and counties may have additional rent control regulations.
District of Columbia
The allowed increase in the District of Columbia is based on the Consumer Price Index plus 2%, but it cannot be more than 10%. If tenants are elderly or disabled, landlords can only raise rent based on the Consumer Price Index, with a cap of 5%. Additionally, if a unit becomes vacant, the landlord cannot raise rent by more than 10% or by more than 30% of the rent for a comparable unit.
In Maine, local municipalities are allowed to pass rent control measures. Portland did this in 2020 – the new Rent Control Ordinance went into effect in 2021. The law establishes a base rent, caps rent increases, and creates new tenant protections, such as a notice of rent increase. The base rent is the rent charged in June 2020 and the maximum rent hike for 2023 is 7% of the current rent.
Maryland does not have statewide rent control, but some municipalities have rent regulations. In Takoma Park, rent stabilization has been in effect since 1981. For rent increases occurring between July 1, 2022, and June 30, 2023, the maximum allowable rent increase is 7.3%.
In Minnesota, Minneapolis and Saint Paul have approved rent control measures. Saint Paul approved the Rent Stabilization Ordinance in 2021. This was amended in 2022, with the new rules going into effect on January 1, 2023. The standard allowable increase without city approval is capped at 3%, but higher rate hikes may be allowed in certain circumstances. In Minneapolis, the Housing/Rent Stabilization Work Group was established to create recommendations for rent control.
New Jersey does not have statewide rent control, but some cities and counties do. For example, landlords in Newark must register with the Division of Rent Control to raise rents. Since 2014, rent hikes have been capped based on the Consumer Price Index. Elizabeth had a $20 cap on annual rent hikes, but, according to NJ.com, the city council recently voted to change this policy, although a rent cap of 3% will remain in place.
New York does not have a statewide rent control law, but many municipalities in the state have their own rent control or rent stabilization laws. Rent control laws typically apply to buildings constructed before 1947 and rent stabilization laws to buildings constructed between 1947 and 1974. In addition to limiting rent hikes, rent control laws restrict evictions.
The Rent Guidelines Board sets rates for rent increases for rent-stabilized apartments in New York City, the City of Kingston, Nassau, Westchester, and Rockland. In New York City, the Maximum Base Rent system determines rent rates for units with rent control. The New York State Division of Housing and Community Renewal sets rates for rent-controlled units in municipalities outside of New York City.
Oregon has statewide rent control. Landlords cannot raise rent more than 7% plus the average amount of inflation over the past 12 months, but this limit only applies to buildings that are at least 15 years old. A new state law also prohibits no-cause evictions of tenants who have been in their homes for at least one year.
Rent increases are rarely popular with tenants, however they are necessary from time to time. Although landlords might be tempted to raise the rent annually in accordance with the rise in cost of living, one or more of the following criteria should apply if you are considering increasing the rent:
Market value increase: If the rent for similar properties in the area has gone up, it may be appropriate to raise rent for your property as well. This will help you stay competitive in the market and ensure that you're getting a fair price for your property.
Property improvements: You have made significant improvements to the property: If you have made significant improvements to the property, such as a new roof, new appliances, or remodeled bathrooms, you may be able to justify a rent increase.
Increased operating costs: If your operating costs have increased, such as property taxes, insurance, or utilities, you may need to raise rent to cover these costs.
Price adjustment: If your tenants have been paying the same rent for a long time, it may be appropriate to raise rent to reflect market changes and increased costs. Keeping a rent ledger will help you keep track of how much rent you charge year over year, and whether it's time for an increase or not.