Like many cities in the United States, the Minneapolis-St. Paul region has been experiencing a bit of a housing boom. Here’s a breakdown of the current housing market in the Twin Cities.
- Rental vacancy decreased to 3.6% by the end of 2021, meaning rental availability is lower than usual for renters.
- According to U.S. Department of Housing and Urban Development, the average home price for the Twin Cities metro area was $298,300 by the end of 2019 – a 5% increase from the prior year.
- More recent data shows that the average price of a home in Minneapolis is just over $330,000 – a 5.6% increase from 2021.
- The average home price in St. Paul is $284,488, an increase of 9.1% from last year.
High demand for housing is expected to continue for the foreseeable future. With home values on the rise and a surplus of prospective tenants, some landlords may be reassessing how much they should charge for rent.
Although it’s always a good idea to evaluate costs, landlords can quickly find themselves in a dilemma when it’s time to raise the rent. Although increasing the rent may help with costs, it can quickly drive good tenants away if it’s not done carefully. Here are some tips to make the process of raising rent easier for all involved. Although these tips seem simple, they go a long way in maintaining a good relationship with your tenants.
Always stay within the limits of fair market value.
The rental market in your area, above all else, drives the price of rent. Researching other rentals in your area can give you valuable insight into rent prices nearby, and what tenants will be expecting for that price. If you raise rent too far above market value, existing tenants may choose not to renew their lease and find other, more affordable housing. Not only will you have to contend with the expenses of tenant turnover, but your vacant rental property will no longer be competitive in your market. Rentals that aren’t competitive tend to sit vacant for far longer than properties that are appropriately priced within the limits of the market.
Researching the rental market is fairly simple, and worth the time it takes. You can use free tools like Zillow, Rentometer, or Realtor.com to see other rentals in your area. Search for rentals close to your property with a similar number of bedrooms, bathrooms, and amenities. The closer these comparable rentals are to yours in terms of size and location, the better. If you compare rentals that are larger or have more community amenities, you can get an inaccurate understanding the going rate for your own rental. If the rent for those properties is higher than yours, you should have room to raise your rent. If you find that your current rent is close to other comparable rentals, raising your rent could drive tenants away.
Although you can complete this research on your own, it never hurts to have a professional’s opinion. An experienced property manager or real estate agent can look at comps for you and, combined with their knowledge of the local market, suggest a price for rent.
Always remember that the price of rent is not based solely on your expenses. It must be kept in line with the local market, or you risk costly tenant turnover and vacancies that will bite into your profits. If you find that your expenses are outpacing the local market rate, it’s time to evaluate your finances and see if you’re spending more than you need to.
Be mindful of rent control laws.
If you live in a rent-controlled area, it doesn’t matter what market rent is. You are bound by local rent control laws. These laws typically outline the maximum increase allowed. Stay within these limits, even if you find that your rent is below the market rate. If you don’t follow these laws, you risk expensive fines and angry tenants.
Section 8 sometimes restricts rent as well. If you rent to Section 8 tenants, call your local Section 8 office and learn about the limits they impose before you raise the rent.
Don’t raise the rent all at once.
If your research shows that you are far below market rent, you might feel tempted to raise it in one lump sum to get you on track. However, this is one of the fastest ways to lose existing tenants. If you currently have an ideal tenant who pays rent on time and keeps the property in good condition, it may be more costly to scare them away than to raise the rent in small increments over time.
It’s typically advised to only raise rent by 3-5% each year. Anything more than that can shock tenants and cause them to reconsider renting your property. Before you raise the rent, calculate the percentage of the rent increase.
For example, if you’re currently renting for $1,000 and market rent is $1,100, the total rent increase would be 10% of the current rent. Immediately expecting an extra $100 per month from your tenants can shock them and cause financial hardship, particularly if they aren’t expecting an increase. Tenants who previously were making payments on time can start to fall behind.
In this example, instead of raising your rent by $100 in one year, you would split up the increase. Raise the rent by $50 this year, and $50 next year (a 5% increase). This patience can save you the cost of tenant turnover or the stress of late payments. The key to raising rent and keeping tenants is making the raise manageable for the average tenant’s budget.
One method to avoid large rent increases is to raise rent every year, even if it’s just a little bit. This sets a precedent for tenants and allows them ample time to budget throughout the year. This method gradually raises rent to keep ahead of rising home values and inflating prices in your area.
Give more notice than you need to.
Changes to the original lease require written notice, and raising the rent is a big change. You must send existing tenants a written letter explaining the details of the increase.
Complete the notice according to your lease and local laws. If you find that your local laws specify a longer timeframe than what the lease offers, heed the longer timeframe, and edit your leases for future use. If your lease has a longer timeframe than local laws, heed the lease. Many jurisdictions specify at least a 30-day notice.
The more notice you give, the more time tenants have to come to terms with the rent increase, review their budgets, and decide if it’s an increase they can afford. If possible, giving a 90-day notice is best.
Deliver a letter detailing the terms of the increase.
Each state has different legal options for serving rent increase letters. The most common options are certified mail, hand delivery, posting the letter on the front door, and regular mail. Certified mail is always preferred, as you have a receipt to prove delivery in case you run into trouble down the road. If you choose to send via regular mail, send plenty in advance. Particularly in these times, the mail service takes quite a bit of time and you must be within the legal notice period.
The purpose and benefit of spelling out the terms of the increase are twofold. First, your tenant understands exactly what is changing, and the choices they have. Second, you are protected if the tenant challenges the terms. Being able to refer to a detailed notice can save you from a lot of stress down the road.
The best rent increase letters include the following
- Date the rent increase letter was written
- Name and information of both the tenant and the landlord
- Property address and unit number
- Expiration date of the current lease
- Current rent amount
- Amount of the increase
- Date the rent increase will go into effect
- Due date for accepting rent increase
- Due date of the non-renewal notice should the tenant not agree to the rent increase
No tenant will be happy about paying more rent, but you can structure the increase in a way that is fair and predictable. Most people can’t afford hundreds of dollars more per month with short notice, so make it as easy as possible for tenants by providing plenty of notice and keeping increases manageable. Understand that a tenant can choose not to renew their lease based on the rent increase if they prefer to find other accommodations. This is the inherent risk that comes with raising rent. However, if you keep these tips in mind, you’re less likely to face angry tenants and costly tenant turnover.