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The Inflation Effect on Rent: When to Increase Rent

Saad Dar

Writer and Editor at Baselane 21 January 2022 5 Min Read
The Inflation Effect on Rent: When to Increase Rent

Turn on the news or browse the Internet these days and you’ll immediately hear about interruptions to the supply chain caused by staffing shortages and health restrictions due to the COVID-19 pandemic.

If you go deeper down that rabbit hole, you’ll hear about how interruptions in the supply chain are contributing to higher inflation and whether you should be concerned about inflation at all.

But what is inflation? And, what is the inflation effect on rent? We’ll answer these questions below and tell you when to increase rent on your income property.

You can use Baselane’ free platform to automate rent collection. Learn more.

1. What is Inflation?

Simply put, inflation is the decline of a currency’s purchasing power over time. The inflation rate is the rate at which that purchasing power declines on an annual or monthly basis.

Inflation means your dollar buys less than it used to over time, and, as a consequence, the price of goods and services goes up over the years.

Inflation is bad for consumers because they have to work harder to earn more so that they can buy the same amount of goods they did in the past.

If you’re an investment property owner, tenant boards allow landlords to legally raise rent to keep in pace with inflation.

2. How Does Inflation Affect Rent?

Generally, inflation has a positive impact on rent for property owners because it means that they can increase rent and therefore, the income they bring keeps in pace with the rising price of goods. Inflation also benefits property owners because the price of construction goes up, which means there are fewer rental properties available for them to compete with.

Of course, inflation isn’t all positive for landlords because even though their rental income will go up, so will their expenses. At the same time, rental rates tend to remain consistently on an upward trajectory during harsh economic times, which is why investing in property is seen as a good hedge against the effects of inflation and the rising cost of goods. Investing in real estate means you’ll always be able to keep pace with these costs.

As a nice bonus for rental property owners, inflation also increases the cost of housing, which means fewer people can afford to buy a home, which increases demand for rental housing as a consequence.

With increased demand and little supply, property owners are more likely to get the rental rates they’re asking for even if they’re a little high because even though goods and services may be more expensive, everyone needs a roof over their head, and renting housing is generally still cheaper than buying housing, even with inflation accounted for in both scenarios.

3. When to Increase Your Property’s Rent?

It would be nice as a property owner if you could just raise rents and therefore increase your gross income whenever it suited you, but there are strict rules as to when you can increase your rent that apply both nationwide and statewide.

Right off the bat, you cannot increase the rent until the current lease agreement you signed with the tenant expires, so you are locked in at whatever rental rate you agreed to until that happens.

That being said, if your agreement is month-to-month, you cannot raise the rent until the end of the month.

Also, to keep everything fair for your tenants, in most states you have to give at least 30 days’ notice before you can increase rent.

In states like California, you must give 60 days’ notice if the increase is more than 10% of the rent. Even if you’re running a rooming house, where rent is often collected weekly, you still need to give 30 days’ notice for rent increases.In terms of how much you can increase rent by, anything goes unless you own a rent-controlled or rent-stabilized apartment. In that case, the state and the city governments set strict rules as to how much and how often rent can be increased.

For example, in New York, rent-stabilized apartments are ones where limits are placed on how much rent can go up by when a lease is up for renewal.

The increase is based on the cost of living in the local area and the current rate of inflation. Rent stabilized apartments are much more common across the U.S. than rent-controlled apartments, which cap how much rent can be charged at all. In New York, you cannot charge more than $700 for a rent-controlled one bedroom.

Thankfully, if you’re a landlord, most states have banned rent-controlled apartments (i.e., Alabama and Arizona) and some rules around them make them extremely hard to move into even in the states where they exist because sometimes they only exist in certain cities in that state or they can only qualify as rent-controlled under certain circumstances.

Keeping with the New York example, once an original rent control apartment tenant dies the apartment will become rent-stabilized unless the tenant passes the apartment down to a family member who had already been living in the apartment over the past two years.

But it’s not just a question of when you can raise the rent by law, but under what circumstances you should raise the rent. This is often a question landlords struggle with because, according to the 2019 Group Consumer Housing Trends Report from Zillow, 78% of renters experienced a rent increase in 2019, where 55% of those people stated that their decision to move was directly tied to that rent increase.

No renters, no income. As a result, you have to approach raising rent with careful consideration and empathy for your tenants. It’s recommended that you increase rent under the following circumstances:

  • Market rates have increased
  • Property maintenance expenses that need to be covered
  • Property taxes have increased
  • Insurance premiums have gotten higher
  • Homeowner’s association or condo fees have gotten higher

You cannot raise the rent as a landlord or owner under the following circumstances:

  • You try to raise the rent during an active lease
  • The lease doesn’t allow for a rent increase
  • Advance notice for a rent increase wasn’t given properly
  • The property is rent-controlled
  • The increase is or can be seen as retaliation against a tenant
  • The increase meets the standard for discrimination against a tenant according to the Fair Housing Act
  • The increase is being done as a way to force a tenant to move out
  • The increase is to a level prohibited by local law

Our Final Thoughts on the Inflation Effect

For the most part, inflation is beneficial to landlords because it raises the cost of housing which raises rents in turn and therefore, raises their gross income. This is because the demand for rental housing goes up as people become more willing to pay high rents than an unmanageable mortgage in that economic environment.

As a landlord you may have higher expenses due to the cost of goods and services going up, but the fact that you have a rental property means you’ll largely be shielded from the consequences of inflation because the rents on your property will keep pace with the rate of inflation and you’ll likely be able to pay your rent increases beyond just covering your expenses for a nice tidy profit.

Baselane’s landlord banking platform can help you do that by keeping your banking organized to the point where you’ll know when it’s time for a rent increase.

Does rent increase with inflation?

Yes. As the cost of housing goes up due to inflation, so too do monthly rents. In fact, not only can property owners raise rents to keep pace with inflation and the consequential increased cost in goods and services but rental increases on rental properties that are rent-stabilized are often based on the increased cost of living in that particular city and the rate of inflation.

What is rent inflation?

Rent inflation is the increase of monthly rent prices over time. For example, according to the U.S. Bureau of Labor Statistics prices for the rent of primary residences were 1,559.60% higher in 2021 than they were in 1913, which equates to a difference of value of $15,596.04.

Between 1913 and 2021 the average inflation rate on the rent was 2.64% per year, which is pretty high. To put it in perspective, a property with a rent of $1,000 over the year 1913 would cost $16,596.04 over the year 2021.

Does inflation affect rent prices?

Yes. As the value of a dollar goes down over time and the price of goods and services increase, including the price of real estate, so too does rent increase.

This fact is beneficial to landlords because it either increases or maintains the amount of gross income an owner can get from their income property. After all, the managing expenses as a landlord are related to maintaining and owning the property also increase with inflation.

Saad Dar

Writer and Editor at Baselane

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