Rent on an investment property has become a tricky thing to manage. It used to be straightforward: rent was around one one-thousandth of the value. A property worth $300,000 would usually cost around $300 per week to rent. Easy, right? Now, however, properties are often worth more than you could reasonably charge for rent. This is because of rapidly increasing property prices; for older houses with bigger blocks, for example, the land may be worth far more than the house that’s on it. While that’s a good investment for you, it’s unlikely that you’ll find a tenant who’s willing to pay extra with no real gain for them.

Another issue is that as the rental market becomes more competitive, people are staying in properties for longer. While this is a good thing, rolling leases can make it more difficult to increase the rent, as tenants wonder why they should sudden pay more for the same thing.

Landlords and their tenants have an interesting relationship. Something that one views as an asset is someone else’s home, and it’s important to maintain a trusting relationship. However, investment properties are a business, and you will need to have the difficult conversation with your tenants (or their property manager) eventually. But when is the right time? And how much is the right amount?

Can you even raise the rent?

While a landlord is well within their rights to raise the rent, there is a process that must be followed. The first is checking the specifics of the lease you entered into with your tenant. If it stipulates a fixed amount of rent for the term of the lease, with no mechanism for rent increases, then you will have to wait until a new lease is signed. So if your lease doesn’t mention mid-lease rental reviews, you’ll need to wait.

If, however, there are clauses that mention rent reviews, then you will need to make sure that you follow any requirements listed. For example, some leases will protect the amount for rent for the first six months of a lease, then allow for one more rent increase. If this is the case, then you will need to make sure that your tenants are in the second half of their lease before broaching the topic of a rent increase. You’ll also need to give them ample notice of the change, as outlined by your state tenancy board or the lease (usually whichever specifies the longest notice time).

There may be further requirements as well, so be sure to check your state tenancy authority and with your property management before discussing rent raises with tenants.

How much is okay?

Once you decide that you will increase your rent, consider what the market will support. Look at demand in the neighbourhood and what the rent is on similar vacant properties. Be realistic about your prices: comparing an older house with a brand new build might make sense on paper, but it won’t to your tenants. They’ll look at the new price and wonder what else they could afford for the money. While most tenants would rather stay put, if you get too ambitious with your rent, they may look seriously at finding somewhere else to live.

If you have a good property manager, they can start the conversation with your tenant about a possible increase and find out what their feelings are. They can also help you calculate how much is an appropriate increase. You will need to justify the reason for the rent increase when you officially notify your tenant. There are specific reasons you can use to explain it, which your property manager can help you navigate.

Taking the right steps with your tenant

Once you’ve checked that you’re in a position to raise your rent, and you’ve justified the rent increase (and how much it is), it’s time to act. You or your property manager will need to contact your tenant to let them know the news. They’ll need to be given appropriate notice, and you should be prepared for a phone call for clarification or potential negotiation. This can be a delicate process. Before you notify tenants of rent increases, ensuring that any maintenance issues have been fixed is one way to prepare them for the news. Most tenants will understand, but it’s good to be organised and prepared in case things go sour.

Needs change over time, for tenants and landlords alike. Keeping an eye on your rent and making small changes over time might require more notice, but it will be easier for your tenants to accommodate. The potential outcome of a rapid, large rent increase is your tenant giving you notice, which will leave you with zero rent until you find someone new. To minimise these shocks, review your rent often, and keep in contact with your property manager. When it comes time to renew the lease, don’t be afraid to ask if it’s time for a rent increase as well — no one knows what the market will bear better than them!