If you’re an investor, you’ve probably wondered at some point: At what point should I raise rents, and how much should I raise them each year?
It’s a balancing act. You want to retain good tenants, but you also want to make sure you’re getting the maximum rent the market will support. If you don’t pay attention to both sides of that equation, you can end up leaving money on the table.
Start With a 3% Baseline
As a general rule, a 3% rent increase is often a good baseline.
Typically, a 3% increase is an amount that most tenants will continue to pay without deciding to move. Because of that, it’s usually considered a relatively safe increase.
But as an owner, you’re doing yourself a disservice if you simply increase rents by 3% every year and never think about it again.
The market changes. Rents change. And if you’re not paying attention to those changes, you may not be maximizing the value of your property.
Why Market Conditions Matter
Since COVID, rents have increased dramatically across much of the Northeast.
Many owners who simply followed their standard annual increase may have missed significant opportunities to capture additional value. If market rents have moved substantially higher and your rents have not kept pace, you can quickly find yourself well below where you should be.
That’s why it’s important to evaluate your property against the current market rather than relying on a fixed percentage every year.
Shop the Market Like a Tenant
One of the best things you can do is go out and shop your market the same way a tenant would.
Look at the available units in your area and ask yourself a few questions:
- What options are available?
- What rents are being charged?
- How does my unit compare in quality?
- If I were a well-qualified tenant, what would I choose at this price point?
By looking at your property through the eyes of a tenant, you get a much better understanding of where your rents should be.
Understanding the 5% Rule
As you compare your property to the market, a useful guideline is the 5% margin.
If your current rent is more than 5% below market rent, it may be time to consider a more substantial increase.
That doesn’t necessarily mean making a dramatic jump all at once. If the difference is significant, a gradual approach may make more sense. But if you’re well below market, it’s important to recognize that and start closing the gap.
On the other hand, if your rent is within 5% of market rent, that’s often considered a normal buffer between an in-place tenant and a new tenant entering the market.
In many cases, a tenant who is already living in the property will pay slightly less than what a brand-new tenant would pay today. That’s a reasonable tradeoff for retaining a good tenant and avoiding turnover costs.
Put Some Thought Into Renewals
The biggest takeaway is not to handle rent increases on autopilot.
A flat increase across the board every year may be easy, but it doesn’t necessarily reflect what’s happening in your market. Taking the time to evaluate comparable properties and understand where your rents stand can help you make better decisions.
The goal is to balance tenant retention with maximizing the income potential of your property.
Final Thoughts
A 3% increase is often a good starting point, but it should not be the only factor that guides your rent decisions. The best approach is to regularly compare your units to the market and make sure your rents remain aligned with what tenants are willing to pay.
Many investors we work with appreciate having a clear process for evaluating rent increases rather than relying on the same percentage year after year. If you’re looking for investment properties in Pennsylvania or Maryland, or want help evaluating a property’s income potential, please reach out to us. We’re always happy to help.
