Should you give an annual Rent Increase?

The simple answer is Yes!

Many Landlords are indecisive when it comes to giving their Tenant an annual rent increase.

On one hand, their costs are going up every year, but on the other hand, they don’t want to rock the boat and risk losing a good Tenant.

I’ve been there.  We were in the same situation with the Tenants at our first rental property.  They were a fantastic young couple and took good care of the property.  They paid their rent on time and were a pleasure to deal with, so we didn’t increase the rent for many years.

The problem is, eventually the rental rate is way behind the market rate.  In our case, we were $500/month behind.  Money’s not everything, but eventually you start looking at what you’re getting vs. what you could be getting.  When it gets to that point, you kinda start wanting the Tenant to leave, even though they’re a great Tenant.

The Tenants finally gave notice to vacate after about 7 years of renting from us.  I feel a little guilty in saying it, but we were glad that they were moving on, as we’d be able to get the property back up to market rent.  They were fantastic Tenants, but it definitely would have been a better experience for us if we had increased the rent throughout the tenancy.

The lesson for me was: It’s important that a Landlord consider the needs of the Tenant and foster a positive Landlord-Tenant relationship (which we got right), but the Landlord also needs to balance that with protecting their own best interest, so that the relationship is mutually beneficial. 

Reasons why Landlords choose not to give a Rent Increase

Fear of upsetting or losing a good Tenant

Many Landlords are happy with their nice, stable Tenants, so are hesitant to increase the rent because they don’t want to “rock the boat”.  They fear losing the Tenant and the associated costs of finding a new Tenant, plus the risk of a vacancy or getting a bad Tenant next time.

The allowable increase percentage seems nominal

Landlords will also rationalize that the amount of the allowable rent increase (for most units in Ontario the maximum is 2.5% in 2024).  However, you need to consider the long-term. 

They don’t need the money

A great position to be in for sure, but still, the property is an asset and should be performing at peak capacity.  The Landlord should consider Return on Capital and what it looks like if they ever decided to sell the property.  A low rental rate could have a negative impact on the selling price.

Why you should give an increase

Your Expenses will increase every year

As the property owner, your costs will go up every year, guaranteed.  Your Property Taxes, Insurance, Maintenance costs, and maybe even your borrowing costs will go up.  That means that you’re essentially making less money as time goes by.

Keep up with market Rental Rates

Market rental rates generally trend upwards, so you can soon find that your rental rate is hundreds of dollars behind the market rate.  Your Tenants will also see this and will be less likely to move out because their costs will be higher for the next rental unit.  They know they have a good deal and will sit tight. 

The Compounding Effect

As you can see in the table below, even small rent increases compound over time.  This can have a significant impact on the financial performance of the property over the years.  The allowable rent increase may not keep pace with the market, but at least you won’t be too far behind.

Tenants expect a Rent Increase

In general, most Tenant expect that the rent will go up each year and accept it.  If the Landlord and Tenant are on good terms, then the likelihood of a rent increase causing a Tenant to leave is highly unlikely.

You’ll eventually resent the Tenant

As I mentioned in my own story, the Landlord-Tenant relationship must be mutually beneficial.  Fostering a great relationship with your Tenant by not increasing the rent is an admirable quality, but you might eventually resent the Tenant because their rental rate is so low and they have no plans on leaving any time soon.  You’ll start feeling like you’re being taken advantage of, even though it was your choice not to increase the rent over the years.

Low risk of losing a good Tenant

The risk of losing a Tenant is low, as they will likely not be able to find anything cheaper.  Tenant’s keep a close eye on the market and know if they’re at, above or below the market rental rate. 

If they’re generally happy with their rental unit and have good relationship with their Landlord, they are unlikely to look elsewhere.  Finding and moving to a new place is costly and time-consuming for the Tenant (plus the risk of getting a bad Landlord).  As long as the rent increase is reasonable, it makes more sense for them to stay where they are.

Does a Rent Increase need to be on an annual basis?

No, it doesn’t.

In Ontario, a minimum of 12 months must pass between each rent increase and Tenants must be given 90-days notice using the N1 Form.  But that doesn’t mean that you must give a rent increase every 12 months.  You can give an increase every 15 or 18 months, if that makes more sense for you.

What about properties that are exempt from Rent Control?

This is where it can get tricky.

In Ontario, most rental units that were built after November, 2018 are not subject to Rent Control. That means that a Landlord is free to increase the rent as much as they want.

In this scenario, we always suggest that the Landlord keep the increase to a reasonable amount, say 5%.  This amount seems reasonable to the Tenant, yet still gives a significant bump in revenue to the Landlord.

The challenge we’re seeing today is that because the property owner paid such a high price for the property in recent years, most find it difficult to maintain a positive cashflow.  So when the time comes for the annual rent increase, many will base the increase on the carrying costs of the property.  We’ve seen rent increases in the range of $300 – $500 per month.  Not because the Landlord is spiteful, but because their costs are so high and the property is a financial drain on their personal finances.  Unfortunately, for the Tenant the Tenant doesn’t have much choice in this scenario, except to find a cheaper place to live.

Is there a time when you shouldn’t give an increase?

Yes, there are circumstances where it makes more sense to forego the rent increase:

Buyer’s Market

Real Estate works in cycles, so there may be times when supply of rental housing in the area exceeds demand.  This can drive rental rates down, which means that Tenants have more options and might even be able to save a few dollars by moving to a less expensive rental unit.

Price threshold

If your current rental rate is at or near the market rate, then you might want to reconsider giving a rent increase.  As your rate starts to creep above the market rate, Tenants will naturally start looking for something less expensive.

Catastrophic Events

Events like the recent pandemic or the closing of a local Employer can have a significant effect on the rental market. 

In these situations, you should shift your focus to Tenant Retention, as turning a Tenant during these periods would be costly and you’re less likely to obtain a higher rental rate.

In general, we strongly encourage our Clients to increase the rent within the allowable limits annually.  The risk of losing a good Tenant is low and Landlords need to do all they can to ensure that they’re not falling behind every year.  It’s just good business and beneficial to both the Landlord and the Tenant in the long run.

The Responsive Landlord Wins

In todays rental environment, Tenants have higher expectations of their Landlord than they did in the past. I don’t mean that they are more demanding, but they do have higher expectations in terms of living standards, fairness and most importantly: Responsiveness.

The rental business has changed and Housing Providers must recognize that there is now a Customer Service element to the rental business.  The Tenants of today are paying significantly higher rents, have higher living standards, have more selection of rental units available and are a more educated group of consumers than ever before. The Tenant should now be viewed as a Customer, with the Product being the rental unit and the ‘after-sales service’ that’s provided by the Landlord. Responsiveness is a fundamental element of good Customer Service and Landlords need to embrace this.

Our culture has also changed. All of us expect things to happen instantly. Whether it’s texting a friend or ordering food delivery, we expect quick response and swift action. We pretty much have zero tolerance for waiting for anything and Tenant expectations are no different.

But being responsive goes beyond good Customer Service or keeping the Tenant happy; it’s a fundamental aspect of property management that also impacts property maintenance, legal compliance, and the financial performance of the rental unit.

Why being responsive is so critical for a Landlord

Tenant Satisfaction

Responsiveness contributes significantly to Tenant satisfaction. When Landlords promptly address concerns, Tenants feel valued and respected, leading to a more positive rental experience. Satisfied Tenants are more likely to stay in place, reducing turnover costs and stabilizing income for the Landlord.

Keeping Maintenance and Repairs under control

Quick responses to maintenance requests prevent minor issues from escalating into major problems. Timely repairs help maintain the property’s condition and value, reducing the risk of costly repairs down the line.

Legal Compliance

Landlords have legal obligations to maintain safe and habitable living conditions for their Tenants. Prompt responses to issues related to health, safety, conflict and maintenance help Landlords fulfill these obligations and avoid legal liabilities.

Tenant Retention

Responsive landlords tend to have higher Tenant retention rates. Tenants are more likely to continue with their Lease if they feel their concerns are addressed promptly and their living environment is well-maintained. Less Tenant turnover reduces costs and stabilizes the revenue of the rental unit.

Reputation Management

Word-of-mouth can significantly impact a Landlord’s reputation, especially with the advent of Landlord-Tenant Forums on Social Media.  An upset or dissatisfied Tenant can make can cause quite a stir online, which can impact a Landlord’s ability to find good-quality Tenants in the future.

Financial Considerations

Delayed responses to maintenance issues or tenant complaints can result in financial losses. For example, prolonged vacancies due to Tenant dissatisfaction or property damage from neglected maintenance can affect rental income and property value.

How to be a responsive Landlord

Prompt Communication

Respond to tenant inquiries, requests, and concerns in a timely manner. Whether it’s via phone, email, or an online Property Management software platform, being accessible and responsive shows that you prioritize Tenant satisfaction.

Maintenance and Repairs

Quickly address maintenance issues and repair requests. Establish a system for Tenants to report problems and ensure that these issues are resolved promptly to maintain the habitability and safety of the rental property.

Accessibility

Make yourself or your property management team accessible to Tenants when needed. Provide clear contact information and establish communication channels for Tenants to reach out with questions or emergencies.

Proactive Management

Anticipate potential issues and take proactive steps to address them before they become major problems. Conduct regular inspections of the property to identify maintenance needs and address any issues promptly.

Follow-Up

After addressing tenant concerns or completing repairs, follow up with Tenants to ensure that the issue has been resolved satisfactorily. This demonstrates your commitment to tenant satisfaction and reinforces trust and goodwill.

Clear Policies and Procedures

Establish clear policies and procedures for Tenants to follow when reporting maintenance issues or seeking assistance. Ensure that Tenants understand how to contact you or your property management team and what to expect in terms of response times.

Empathy and Understanding

Show empathy and understanding towards Tenants’ concerns and situations. Building positive relationships with Tenants fosters a sense of trust and encourages open communication.

Overall, being a responsive Landlord involves being proactive and attentive to the needs of your Tenants.  Do that and you’re well on your way to fostering a positive rental experience and a well-functioning, financially stable rental property.

Landlord Mistake #3 – Lack of Proper Communication with Tenants

Lack of proper communication with Tenants can lead to a range of negative outcomes for Housing Providers, ranging from Tenant dissatisfaction and increased Tenant turnover to legal issues and financial loss. 

What do we mean by ‘proper communication’?

Using the right language and tone

So many issues and conflicts are caused by the intent and tone of a message being misconstrued by the Receiver.  Short, abrupt Text Messages, poor grammar and language barriers can often cloud the true intent of the message.

As a best practice, the Sender should reread the message and consider it from the viewpoint of the Receiver, then edit the message to ensure that it makes sense and has the right tone.

Using the correct Communication channel

Selecting the correct communication channel is also critical, not only for effective interactions with your Tenant, but also because the Residential Tenancies Act may specify that certain actions are communicated in a certain way.

Text Messaging can be a quick and convenient way to communicate with a Tenant but tends to be less professional.  In some cases, an email message or hard-copy letter by mail is more appropriate and might even be required by law (eg. serving Notices)

Responding in a timely manner

There is no hard and fast rule, but prompt response to a message is just good business and shows respect and empathy towards the Sender.

Why is proper Communication so important?

Tenant Satisfaction

Clear and effective communication helps in maintaining a positive landlord-tenant relationship. When tenants feel heard and understood, they are more likely to be satisfied with their living situation, leading to longer lease durations and lower turnover rates.

Issue Resolution

Good communication allows landlords to address any concerns or issues raised by tenants promptly. This can prevent minor problems from escalating into major disputes and helps in maintaining the property in good condition.

Legal Compliance

Landlords have legal responsibilities towards their tenants, as outlined in the Residential Tenancies Act, in terms of behaviour, responsiveness and how to serve Notices. Proper communication ensures that landlords fulfill these obligations in a timely manner, reducing the risk of legal disputes.  Learn about the most relevant clauses within the Act here.

Rent Collection

Clear communication about rent payment expectations, due dates, and accepted payment methods can help ensure consistent and timely rent collection. It also facilitates transparency, reducing misunderstandings and disputes related to rent payments.

Property Maintenance

Regular communication with tenants allows landlords to stay informed about any maintenance issues that need attention. Timely maintenance not only preserves the value of the property but also enhances tenant satisfaction and retention.

Emergency Situations

In case of emergencies such as fire, flood, or other disasters, effective communication protocols enable landlords to quickly communicate important information to tenants and coordinate necessary actions for their safety and well-being.

Feedback and Improvement

Open communication channels encourage tenants to provide feedback on their living experience, which can help landlords identify areas for improvement and make necessary adjustments to enhance the property and overall tenant satisfaction.

How to improve Communication?

Landlords can improve communication with tenants in several ways:

Establish Clear Channels

Provide tenants with multiple communication channels such as email, phone, text messaging, and a designated online portal for reporting issues or asking questions.

Be Responsive

Respond promptly to tenant inquiries, requests, and concerns. Acknowledge receipt of messages even if a resolution will take time, to reassure tenants that their communication is valued.

Regular Updates

Keep tenants informed about relevant information such as upcoming maintenance schedules, property improvements, or changes in policies. Regular newsletters or email updates can be effective for this purpose.

Use Technology

Utilize property management software or apps that allow for easy communication, maintenance requests, and rent payments. These platforms streamline communication processes and provide a centralized hub for tenant interactions.

Provide Documentation

When communicating important information or decisions, provide written documentation such as notices, letters, or emails to ensure clarity and avoid misunderstandings.

Be Transparent

Foster transparency by openly sharing information about rent increases, status of repairs, property inspections, and any other relevant matters that may affect tenants.

Listen to Feedback

Encourage tenants to provide feedback on their living experience and actively listen to their suggestions, concerns, and complaints. Address any issues raised and take appropriate action to improve tenant satisfaction.

Maintain Professionalism

Maintain a professional demeanor in all communications with tenants, even in difficult situations. Respect their privacy, confidentiality, and rights as renters.

Follow Up

After resolving an issue or addressing a concern, follow up with the tenant to ensure that they are satisfied with the outcome and to reinforce the importance of open communication.

By implementing these strategies, landlords can establish effective communication practices that enhance tenant satisfaction, promote a positive landlord-tenant relationship, and contribute to the overall performance of the rental property investment.

In this series of 8 articles, we explore the 8 biggest mistakes that we see Landlords make and how to avoid them.  Click on the links below to read the previous articles:

Landlord Mistake #1 – Selecting the Wrong Tenant

Landlord Mistake #2 – Not Running the Numbers

Landlord Mistake #2 – Not Running the Numbers!

It’s one of the biggest mistakes that a Real Estate Investor can make: Buying a rental property without running the numbers first. 

So many Real Estate Investors are putting their personal finances at risk by buying a property without understanding what they’re getting into.  We see it again and again and it causes so much stress for the soon-to-be Landlord.

According to a 2023 study conducted CIBC and Urbanation, 52% of rental properties in Ontario were cashflow negative, meaning there isn’t enough rental income to cover the monthly expenses. This figure is likely even higher in 2024, as more mortgages have renewed (at a higher mortgage rate) and more new-build rental units have come online (at high purchase prices).

This is shocking!  Whatever happened to the fundamentals of real estate investing?

Like many aspiring real estate investors, I first learned the fundamentals by reading ‘Rich Dad, Poor Dad’ and other books by Robert Kiyosaki.  The Rich Dad philosophy taught the four fundamentals of real estate investing, the most critical ones being:

#1 – The investment must put money in your pocket.

#2 – The investment must stand alone.

This seems like common sense, but somehow investors are ignoring the obvious and getting themselves stuck in a difficult situation.

Why does this happen?

FOMO – Fear of Missing Out

Real Estate Investing became trendy after the 2008 financial crisis.  At the time, it was easy to buy a rental property and have it cashflow from the beginning.  That all changed by 2017, when housing prices reached a threshold where it was becoming difficult to achieve cashflow on a new rental property.

Since that time, things have gotten even worse.  Low interest rates, increasing population and a shortage of housing supply have driven up home prices to the point where it’s nearly impossible to buy a property that cashflows.  However, the real estate investing trend has continued unabated, with late-comers wanting to get in on the action (ie. FOMO – fear of missing out), while ignoring the fundamentals. 

Problem is: when the dust settled, they found themselves with properties that were losing money each month, even though rental rates had also increased significantly.

We see so many new real estate investors that buy a property without first determining if the estimated rental rate will cover their costs.  This seems like it should be common sense, but many people get caught up in the frenzy and excitement of buying a property and are basically hoping and praying that it will work out.  It usually doesn’t.

Time-delay when buying a new-build

Another common scenario is that the property was bought off builder plans and the market changed during the 2-3 years that the buyer is waiting for the property to be built. 

Realistically, there’s not much you can do to predict the expected rental rate or interest rates years down the road.  In this case, the risk is difficult to mitigate.  Best to be ultra-conservative when you run the numbers, so that you have some wiggle-room if rates aren’t what you planned.

Not understanding how the rental market works

Many new Landlords don’t understand that rental rates are market-driven, not cost-driven.  In other words, it doesn’t matter what you paid for the house or what your property taxes are or how much your mortgage payment is, the maximum rental rate for the property is determined by what the market will bear, meaning what Tenants are willing and able to pay.

Not considering maximum affordability

Unlike home buyers, who have different strategies to stretch the affordability of a property (eg. Lower interest rates, larger down-payment, longer mortgage amortization), Tenants can only do so much to afford a higher rent payment.  No matter what they do, there is a threshold of affordability by the time they pay for utilities, car payment, fuel, insurance, groceries, etc. 

Real Estate Investors need to take this into consideration when buying a property.  Best way to do this is ask yourself: How much rent would I be able or willing to pay for that property?  Ask friends or family that are renting or have children that rent, how much they are paying or try to determine their maximum affordability.  It’s always much less than you would expect.  Again, it’s always best to be conservative with your estimates.

Other important considerations:

Real Estate might not be the best investment choice

Real estate may not be the best investment choice if you’re losing money every month.  Sure, you might have long-term gains from Property Appreciation (or might not), but that is considered Speculation, not Investing. 

Real Estate is generally considered a safe, long-term investment, but buying a rental property that’s losing money every month would be like buying stocks that are going down in value.  It just doesn’t make sense. 

You might be stuck with a financial burden

You should also remember that you could be stuck with your money-losing property. You might be locked into a fixed-term mortgage with substantial penalties for breaking it, or unable to sell the property because of market conditions or the substantial financial loss you would take because of Realtor Commissions, Land Transfer Tax paid, etc.

Your Tenants depend on your stability

When a Landlord is under financial strain, the Tenants will eventually be affected.  This might start as an unwillingness to do repairs or a decline in the general upkeep of the property.  The Landlord may also try to impose an unfair or illegal rent increase on the Tenant.  If the financial strain persists long enough, the Landlord will eventually sell the property, which usually results in the Tenant being uprooted and evicted.  It’s a lose-lose situation for everyone involved.

So, what should you do?

Do the Math

Before purchasing an investment property, you need to be certain that it will be cashflow positive.  To do this, create a simple spreadsheet with your revenue and expenses, like the one below.  This is the actual spreadsheet that I used for every rental property we purchased.  If the numbers didn’t work, we didn’t buy the property.

Be real with your calculations

Always be on the conservative side with your estimates of rental income and expenses.  Don’t base your calculations on the extremes, (high rental rates and low expenses).  Find something in the middle that is reasonable and obtainable.

Plan for the worst-case scenario.  No matter what you do, things will not always go as planned.  You will have unexpected repairs, you will have vacancies, you will have larger capital expenditures (eg. Roof replacement, new furnace, new flooring, painting, etc.).

Look for properties with potential upside

Upside means that there is potential to improve the property as a way of increasing rental income.  Here are a few ways to do that:

  • Renovate to improve the quality of the property, to attract a higher-quality Tenant and higher rental rate.
  • Add a secondary rental unit.  For example, a legal Basement Apartment.
  • Add an Accessory Dwelling Unit (ADU).  This is a separate building on the property, if space permits.  Many municipalities are fast-tracking approval of this type of structure, as a means of addressing the current housing shortage.
  • Consider a Student Rental or a house that is suitable to rent by the room, as it’s possible to obtain higher total rental income.

If the numbers don’t work, don’t buy it

As a prerequisite, you want to make an educated buying decision without any surprises.  A real estate investment shouldn’t have a negative impact on your personal finances.  In fact, the whole purpose of investing is to enjoy the positive impact that the investment should have on your personal wealth.

If the investment property doesn’t meet these prerequisites, then don’t do it!  Keep looking for options that will grow your wealth, not deplete it.