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Inflation impacts everyone, regardless of industry. But its impact on real estate is especially important. That’s because, oftentimes, inflation causes rental rates to increase. This affects investors, landlords, and residents alike.
In this article, we’ll explore how inflation influences real estate investors in depth and provide guidance for including rent rate adjustments in a rental property lease agreement.
Let’s start with a look at how inflation specifically impacts investors in the real estate industry.
How Inflation Impacts Real Estate Investors
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Increased Demand for Rentals
The good news? Inflation often increases the demand for rental housing. That’s because many first-time homebuyers choose to put off purchasing a home and may turn to rentals instead. This higher demand can reduce the risk of extended vacancies, providing a stable rental income stream.
Now for the bad news…
Increased Building Costs
Simply put, inflation drives up the cost of building homes. The prices for materials and supplies rise, as do labor costs. As a result, finding reasonably-priced rental homes as an investor becomes challenging, and expanding your rental business can be more difficult.
Higher Interest Rates
With inflation comes higher interest rates. Borrowing from banks becomes more expensive, complicating the financing of new deals and property acquisitions.
Despite these challenges, real estate investments can still thrive during inflationary periods. Success largely depends on property location and market conditions.
One common strategy for managing a successful rental property despite inflation wherever you are, though, is through a rental rate increase. Let’s take a look at how to implement this effectively.
Increasing Rent During Inflationary Times
Raising rent is a sensitive issue, especially during times of high inflation. Doing your research and communicating clearly and effectively with residents is important.
If you must raise rent, consider these steps:
1. Determine the Cause
Identify the reasons for the rent increase to understand how much it needs to increase and to more clearly explain it to your residents.
Common causes include:
- Utility costs
- Maintenance fees
- Property taxes
- Insurance premiums
2. Include Rent Increase Clauses in Leases
If you’re between residents, add a rent increase clause to your lease. Specify when and by how much the rent will rise. Predictable, gradual increases are usually more acceptable to residents and help avoid sudden, significant hikes that could result in a resident deciding not to renew their lease.
3. Research Local Properties
Before raising rent, research local rental prices and vacancy rates. Ensure your increase is in line with the market to remain competitive and to prevent your resident from moving to a similar property that is charging less each month. We also recommend that you avoid significant rent hikes if similar properties are experiencing high vacancy rates as this could mean your property sits vacant which means you lose money.
4. Give Sufficient Notice
Provide ample notice (typically 30-90 days, depending on your location) before raising rent. This shows respect for your residents and gives them time to decide whether to renew their lease or find a new property.
Example Rental Rate Clause
There are many ways to phrase a rent rate adjustment clause in a lease agreement, but it should address all of the main points your resident will want to know:
- How much notice they will receive about a rate increase
- The amount increase they can reasonably expect
- The timing of a potential increase
- How long they have to consider an increase before renewing or vacating the property
Below is an example lease agreement clause that provides information on each of these key points. We recommend working with a legal professional in your area to ensure the clause you include in your lease agreement is compliant based on local laws and regulations.
Rental Rate Increase Clause
The Landlord reserves the right to increase the rent for the Premises during the term of this Lease Agreement, under the following conditions:
Notice of Increase: The Landlord will provide the Resident with written notice of any rent increase at least [insert notice period, e.g., "60 days"] before the increase becomes effective.
Maximum Increase: The rent may be increased by no more than [insert percentage, e.g., "5%"] of the current monthly rent per annum.
Timing of Increase: Any rent increase will occur only on the anniversary date of the Lease Agreement or upon renewal of the Lease Agreement, unless otherwise agreed in writing by both parties.
Acceptance of Increase: The Resident's continued occupancy of the Premises after the effective date of the rent increase will constitute acceptance of the new rental rate. If the Resident does not accept the increase, the Resident may terminate the Lease Agreement by providing written notice to the Landlord no less than [insert notice period, e.g., "30 days"] before the effective date of the increase.
Final Thoughts: Increasing Rent During Inflation
While raising rent during periods of high inflation can be difficult, it might be a necessary action landlords must take. If you’re facing this situation, we recommend approaching the process with respect and clear communication so your resident has all the information and time they need to make the best choice for them.
If you’re considering hiring a professional property management company to handle your rentals, including conversations like these, contact Evernest to get started! We help landlords navigate inflationary periods while ensuring their properties remain financially viable and their residents remain happy.