Fairly Increasing the Rent Of An Investment Property
How to Adjust the Rent Fairly & Transparently
When you buy a property as an investment, you generally become the landlord. That means you either manage the property yourself or get help from a professional service. One of the important tasks is handling the rent.
Over time, you can adjust or increase the rent to improve your cash flow, but it’s not a free-for-all. You need to keep the rental agreement in mind and follow the law and local regulations. At the same time, it’s important to stay open and fair with your tenants.
But no worries: it’s not as complicated as it sounds. There are plenty of good reasons to raise rent, and some practical tips to make sure it’s done fairly and smoothly.
It makes sense to first take a look at the rental agreement with your tenants, because you may have already agreed on certain conditions. In rare cases, a rent increase might even be excluded. On the other hand, you might have agreed on automatic rent adjustments, which can be done through graduated rent agreements or indexed rent agreements. Maybe you’ve also modernized your property — that can be another valid reason to adjust the rent.
If you’ve been thinking about raising the rent, the text below explains when a rent increase is possible, when it makes sense, and offers practical tips for implementation and fair communication with tenants. Prefer a quick audio summary of the key requirements? Then check out our podcast. For everyone else, all the details are provided below. 🙌
- When It Makes Sense
- When It's Possible
- How to do it the right way
- Mutually agreed rent increase
- No increase possible
- FAQ
When Does a Rent Increase Make Sense?
There are good reasons why a rent increase can make sense for you and sometimes even be necessary. You should not be concerned solely with generating more income or the highest possible cash flow. You should act reasonably and think of your tenants as well.
Nevertheless, real estate is a form of investment. And an investment is also about the return. And that can be increased by adjusting the rent. By the way, if you plan to resell the property in the medium term, you should think about regular rent development anyway. After all, you can only develop rents gradually. But if you leave it for years, a potential buyer of your property will not be able to compensate for it so quickly. So you will get a lower selling price because buyers will buy a property with a comparatively low return.
Keep this in mind!
If you have not developed your rents over a longer period, the resale value of your property will suffer. Potential buyers can only make up for this incrementally and thus buy a property with a lower initial return.
In general, the current situation of high inflation rates is one in which an adjustment of the rent is quite reasonable and justifiable. After all, costs are also rising for you as a property owner. By the way, if you want to know more about real estate in inflation, you should take a look here. 👇👇
When You May Increase the Rent
When are you allowed to increase the rent of your property? As a landlord, you can adjust the rent every three years. However, you have to follow the rent index for your property's area and not get into the "extortionate range." This is reached when your rent is 20% or above the local rent. You can usually avoid that by looking at the official rent index of the city.
Often, however, a look at the rental agreement will also help. There are rental agreements that state when the rent will be increased. This is the case if your tenant has agreed to a graduated or index-linked lease.
In addition, modernizations you are carrying out or have carried out on the property are a reason to adjust the rent. But here, too, of course, there are legal provisions and limits—more about this below.
Essentially, you can increase the rent in the following cases:
Increase according to rent index
Increase according to graduated or indexed rent
Increase after modernization
Rent Adjustments Under a Graduated Rent Agreement
Rent increases under a graduated rent agreement are straightforward — the monthly rent automatically rises each year by a fixed amount specified in the contract. If you’ve signed such an agreement with your tenant, any additional rent increases outside the agreed schedule are excluded.
A graduated rent clause is only valid if:
The rent increases are stated as exact amounts, not just as percentages.
The increases occur no more than once per year.
Any minimum rental period stated in the contract does not exceed four years.
If any of these conditions are not met, the clause for staged rent increases is invalid.
As a landlord, you must always comply with legal regulations such as the rent control (Mietpreisbremse) when applying increases.
Rent Adjustments Under an Indexed Rent Agreement
With an indexed rent agreement, rent development is not as predictable as with a graduated rent, but potential increases are still regulated in advance through the contract. An indexed rent agreement ties rent adjustments to the Consumer Price Index (CPI) published by Germany’s Federal Statistical Office, reflecting changes in the cost of living.
A rent increase under an indexed rent agreement is only valid if:
The increase is documented in writing,
There is at least one year between each rent adjustment,
The calculation and new rent amount are fully disclosed, and
The local comparative rent is not significantly exceeded.
If any of these conditions are not met, the indexed rent adjustment clause is invalid.
As with other types of rent increases, landlords must comply with legal regulations, such as the rent control (“Mietpreisbremse”).
Benefits for landlords
If you conclude graduated or index-linked rental agreements with your tenants, you don't have to worry about the development of the rent on an ongoing basis. And your tenant knows what to expect.
Modernize your apartment ➡ Adjust the rent
If you have not agreed on a graduated or index-linked rent with your tenants but still want to increase the rent, consider modernizing your property. In any case, it is a good idea to talk to your tenant. This way, you can find out which updates would be most practical from the tenant's point of view.
It isn't initially relevant for a possible rent development what you do to the apartment. It could be a bathroom modernization, new hardwood flooring in the apartment, or something else. As mentioned, it makes sense to discuss this with your tenants. Because then both sides benefit from modernization: The tenants profit from increased living comfort and can better understand the development of the rent. You can adjust the rent with a clear conscience and even increase the property's value.
However, it is also important here that you adhere to the legal regulations. You are only allowed to pass on a maximum of 8% of the monthly modernization costs to the rent. Public subsidies that you have received, interest on loans, or savings for maintenance costs must be deducted from the expenses for modernization. In addition, you may only adjust the rent after the renovations have been completed.
Implementing rent increases correctly and fairly
If you want to implement the rent increase, the written notice and the implementation must comply with applicable law. We will get to that in a moment.
First, you should communicate fairly and transparently with your tenants. This makes things significantly more pleasant for both sides. Because rent increases are a sensitive topic for tenants, we recommend that you meet them in person at an early stage.
On the one hand, this gives them the chance to prepare themselves early. On the other hand, it allows you to explain the rent adjustment in an understandable and comprehensible way. Good tenants are valuable, and only if you're fair you'll get the trust back. You can learn how to find good tenants here:
Of course, you also have to meet legal requirements when increasing your rent. However, you only have to comply with a few formalities. You have to announce the rent increase to your tenants in writing. You must give your tenants at least three months' notice, which means that if you announce the adjustment in January, an increase will not be possible until April 1 at the earliest.
Depending on the reason for your rent adjustment, you will need to attach different things to this letter. Here is a checklist of what your rent adjustment letter must contain:
What to include in the rent increase notice
Your checklist:
The correct salutation of all tenants
Date
Indication of when new rent will apply
Reason for the rent increase
A deadline by which the rent will be increased
Request for the tenants' consent
For modernization measures: reference to the regulation, when tenants must tolerate modernizations according to §555d BGB.
Finally, a tip, because you depend on your tenants' response: Make it as easy as possible for them. It often helps if you enclose a stamped envelope for the reply. With an early, personal communication of the rent increase, you have the best chances for a quick approval.
Of course, you are dependent on the consent of your tenant. But what happens if you don't receive an answer or if the tenant refuses to give their consent even though you have complied with all legal requirements? In this case, the legal path is open to you, and you can file a lawsuit.
Mutually agreed rent increase: no cap
Mutually agreed rent increases offer landlords the opportunity to find fair solutions together with tenants - especially in cases where the rent is significantly below the local rent level. Unlike unilateral adjustments, the statutory rent caps are not mandatory here. This creates leeway, provided you enter into a dialog with the tenant. If you listen and take seriously what the tenant wants - such as minor modernizations in the kitchen or bathroom - you can push through a higher rent without straining the relationship. This creates a win-win situation: the apartment becomes more attractive, the tenant feels valued and the rent develops in line with the market.
This approach can work particularly well in long-term tenancies where there is trust. Instead of experiencing the increase as a one-sided measure, the tenant sees it as an improvement in their living situation. For landlords, it is an opportunity to act in an economically sensible way without risking conflict. The prerequisite is openness on both sides - then a pure rent increase can turn into a constructive dialog that benefits both sides.
No rent increase possible? Does that exist?
Yes, there are cases in which you cannot adjust the rent. However, this is rare and can be found in the lease agreement.
Often a rent increase is excluded if a former owner sells the apartment but remains living in it himself and you have agreed so in the lease. If you buy an apartment in this constellation, it can still make sense. However, only if the seller accommodates you accordingly with the purchase price.
Another case in which an adjustment of the rent is excluded: Your tenant has renovated the apartment at his own expense before moving in. Here, too, it can make sense. After all, you save money and increase the value of the property.
In any case, the issue of rent development is just one of many that show: you need to look closely at any existing lease agreement of the property you're investing in. Because if your previous owner made such a deal when buying, you no longer profit sufficiently from it but still can't develop the rent.
Is there an easy and fair way to increase the rent?
Absolutely. As is often the case with real estate, it's not as complicated as it sometimes seems. The key to success is honest and transparent communication with your tenants. Maybe you can find ways to adjust the rent and increase your tenants' living comfort through modernizations.
And most tenants agree to fair and timely announced rent adjustments. And for you as a real estate investor, the topic is essential anyway because:
... your costs also increase over the years and ...
... if you don't develop the rent over the years, it'll reduce the return as well as the resale value of the property.
It's especially important if you bought your property for retirement or investment purposes. By the way, if you purchase your property with Urbyo, our experts can give you tips on how to deal with the issue sensibly and proactively.