Increasing the rent the fair way
How to adjust the rent fairly, transparently & proportionately
Can I increase the rent just like that?
Of course, you cannot increase the rent of your property arbitrarily. First, you must keep an eye on the rental contract and observe the legal framework. In addition, you should also be open and fair to your tenants. But don't worry: It's not as complicated as you think. Because there are excellent reasons to increase the rent. And there are also some tips on how to do it reasonably.
It is logical that you first look at the lease agreement concluded with the tenants. Because you may have already agreed to something there. And there are rare cases in which a rent increase is excluded. On the other hand, you may have decided on automatic rent adjustments. This works via graduated rental agreements or index-linked rental agreements. Perhaps you have modernized your property? Because that can also be a good reason for a rent adjustment.
Have you been considering increasing your property's rent for a while? In the text below, you'll find out when a rent increase is possible and when it makes sense. You'll also gain helpful tips on enforcing and fairly communicating the change. You'd rather get a summary of the basic requirements on the side? Then listen to our podcast. For everyone else, you'll find all the information below in the text. 🙌
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. 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. 👇👇
Increase the rent? You can, in these cases
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 according to a graduated rental agreement
Increasing the rent under an agreed graduated rent is relatively easy. This is because the monthly rent increases annually by an amount specified in the contract. If you have concluded such a graduated rental agreement with your tenant, increases outside the graduation are excluded.
The graduated clause in the contract is only effective if ...
... the increases are specified with an exact amount and not only as a percentage.
... the increases are not agreed to be more frequent than annually.
... a minimum rental period in the contract, if any, has not been agreed for longer than four years.
If one of these conditions is not met, the agreement of the staggered increase is invalid. As a landlord, you are always bound by legal regulations such as the "Mietpreisbremse" (rent brake) when it comes to increases.
Rent adjustments according to an index-linked rental agreement
With index-linked rent, the possible development of the rent is not as clearly calculable as with graduated rent. Still, the potential increases are regulated in advance in the rental agreement. An index-linked rental agreement includes a contractually agreed rent increase based on the price index of the Federal Statistical Office for the cost of living of private households in Germany.
The increase under an index-linked lease is effective if ...
... the increases are recorded in writing,
... there is at least one year between the individual rent adjustments,
... the calculation and the new rent are disclosed in each case, and
... the local comparative rent is not significantly exceeded.
The following applies here: If only one of these requirements is not met, the agreement of an adjustment according to the index is invalid. Here, too, you as the landlord are bound by statutory regulations such as the "Mietpreisbremse" (rent brake).
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
The correct salutation of all tenants
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.
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.