Below Market Rent: How to Raise Rates

As a property owner, you never want to end up in a situation where the property you purchased isn’t creating any return on investment. This can happen for a variety of reasons, but one common reason is being locked into a below market rent agreement.

If you end up in this situation as a landlord, your first instinct may be to raise the rent cost immediately. However, the vast majority of lease agreements promise tenants that their rent rate won’t be changed until they renegotiate their lease at the point of its termination. 

Additionally, even if the nature of your agreement with your tenant allows you to raise their rent at your discretion, you’re likely to have a hard time keeping that tenant depending on how much you raise the rent and how suddenly you do it. 

If you are planning to raise your rent by any amount, it’s important to have a good grasp of the current market rate for rent before you do so. This will make it easier to keep the tenants you currently have despite increasing their monthly rent amount.

What Is the Rent Market Rate?

The market rate of rent is an ever-changing number that can depend on a variety of factors. To start with, every neighborhood has its own rent market rate, and this number is ultimately decided by how much tenants are willing to pay for properties in the area. 

Any given neighborhood’s rent market rate can change due to upgrades to the neighborhood’s infrastructure; the building of new schools, workplaces, stores, and other facilities that are valuable to local residents; changing rates of inflation on a city- or nation-wide level; and many more factors.

How to Determine Your Local Market Rate

Since the rent market rate can be affected by so many different factors in a given neighborhood, the best way to determine what the market rate is in the area where your property resides is to find out what tenants are paying in rent for the properties surrounding yours. You can do this by researching local housing listings on facebook, Zillow, or consulting with a realtor.

This can help you to figure out if you’re currently charging below market rent or even overcharging.

Why Do Landlords Charge Below Market Rent?

Very few landlords intend to charge below the market rate. However, there are multiple situations in which this can end up happening without it being the landlord’s goal. 

In many cases, property investors will purchase a property that already has a tenant living on it — that tenant then becomes the landlord’s inherited tenant. 

Generally, an inherited tenant will be entitled to the same rent amount they were paying before the change of ownership, which means that the new owner may have to charge below market rent until the tenant leaves or their lease is renegotiated. 

Additionally, many landlords make the mistake of resigning leases with tenants without raising the rent. Landlords will usually do this to keep their tenants happy and prevent them from seeking housing elsewhere, as finding a new tenant is a lot more difficult than keeping the one you already have. 

However, this means that if a tenant stays for multiple years, it’s almost guaranteed that the rent they originally agreed to will end up being below the market rate at some point.

How to Raise the Rent

If you’ve determined that it’s time to raise your rent prices in order to keep up with the market rate, it’s understandable to be concerned about bringing this up with your tenants. You don’t know how they might respond.

Keep in mind that it’s completely possible to negotiate a higher rent with your tenant without causing them to move out at the end of their lease or even break their lease. Just make sure you go about it the right way.

Back Up Your Market Rate Claim

When you propose a higher rent rate to your tenant, it’s important to back up your proposal with facts about the current market rate in your area. If you can prove to them that they are currently paying below market rent, it will be more reasonable to ask them to pay more.

Communicate Openly with Your Tenant

Negotiating changes in rent prices is always a touchy subject. Make sure to listen to your tenant’s concerns and communicate as openly as possible with them throughout the entire process without compromising your own needs as a landlord.