Every landlord aims to keep up with inflation by increasing rent, but often find it challenging. I recently discovered a method that involves minimal tension: an automatic rent increase clause in the lease agreement. This approach became clear to me when I received an unexpected extra $200 from my tenants due to a previously agreed annual rent increase that I had forgotten.
When I first advertised my newly remodeled San Francisco home in mid-2022, I listed it for $8,500, despite not having rented a single-family home since 2017. After checking comparable listings, I felt this was a reasonable ask. The home, having undergone extensive renovations, now included additional living space and high-quality finishes, justifying a higher rental price than the $6,800 I charged previously for the upper floors.
During negotiations, the tenants, a family of three planning a trip to Europe, countered with $8,000, which was $1,200 more per month than my previous rate. To accommodate both their needs and my own, I proposed a gradual rent increase over five years, starting at $8,000 and increasing by $100 annually, eventually reaching $8,500. This plan would save them $13,200 over five years compared to the initial rate, providing them an incentive to commit long-term and reducing my potential losses from vacancy.
This strategy of embedding an automatic rent increase in the lease eliminates the awkwardness of negotiating rent each year, ensuring steady income growth to match cost inflation. This method is particularly useful during the initial lease negotiation, setting clear financial expectations and fostering stability for both parties.
Landlords should consider implementing such a clause routinely, adjusting the terms according to legal limits and market conditions. If a potential tenant negotiates the rent, landlords can offer a reduced rate initially in exchange for a predefined schedule of increases. This compromise can secure longer tenancies and easier management.
However, it’s important to check local laws as lease agreements and rental regulations can vary significantly by city. In San Francisco, for example, leases revert to month-to-month agreements after a year, potentially limiting the enforceability of long-term fixed increases unless renewed annually.
A good relationship with tenants is crucial. Being a landlord is akin to a part-time job that requires active management and problem-solving. Choosing tenants who respect the property and pay rent punctually is vital, as is having all agreements clearly documented to avoid disputes.
For example, I specify in leases that tenants are responsible for yard maintenance. Recently, when a tenant requested that I remove dead plants, which they neglected, I chose to resolve the issue amicably by handling it myself to maintain good relations and property aesthetics.
In conclusion, while being a landlord has its challenges, strategies like the automatic rent increase clause can simplify financial aspects, leading to better tenant relationships and improved investment returns. For those not inclined to active property management, investing in real estate through funds like Fundrise offers a more passive income alternative.
