A how-to on raising the rent

Landlords don’t want to scare away tenants by raising the rent, but here’s a lesson in how and why to do it.  

By Paul Kondakos 

Income properties are in essence a business, and as such, you are constantly trying to increase income and decrease expenses. One of the easiest ways for landlords to do the former, at no cost and little effort, is to ensure that they hand out their annual Rent Increase Notifications in a timely manner. This will both strengthen your cash flow and in turn increase the market value of your property.

In most cases, the rent for a unit can be increased if at least 12 months have passed since a tenant first moved in, or if at least 12 months have passed since the last rent increase.

Proper Notice

Typically at least 90 days written notice is required. The governing provincial body provides forms to be used for rent increase notifications. In Ontario, the form is an N1 - Notice of Rent Increase. Prudent landlords will have already issued their rent increase notifications for 2013. For those not-so-prudent landlords, if you act now and issue your rent increase notifications anytime before Nov. 1, the rent increase will take effect starting Feb. 1, 2013.

Rent Increase Guideline

The rent increase guideline applies to most private residential rental accommodations with certain exceptions. The guideline varies from province to province so make sure you check with your governing provincial body. In Ontario, the maximum allowable rent increase for 2013 is 2.5% (which also happens to be the maximum allowable under the recently imposed cap in Ontario).

Small Increase = Big Effect

Let's look at increasing the rent of just one unit, which currently rents for $800/month. The allowable rent increase guideline in Ontario was 3.1% for 2012. As such, you could increase the rent of this unit to $824.80/month. (You may be tempted to round it to $820 or $824, but that would be a mistake as every penny counts.) You have now increased the income that this one unit generates by $24.80/month or $297.60 on an annualized basis. It doesn't seem like much until you put the power of the multiple to work. $297.60 in annual income is worth $5,952.00 in market value based on a 5% cap rate. And that is just one unit. How about if you have 6 or 12 units that are due for a rent increase?

Will I Lose My Tenant?

One of the most common reasons that landlords do not issue rent increase notifications is that they fear they will lose good tenants. In all my years of handing out notifications, I've never lost a tenant due to the increase (some have complained but never left). At the same time, if it does become a point of contention, you as the landlord have to explain to them that your operating costs are continually subject to inflation. This includes, property taxes, hydro, water, gas, waste removal, etc... Unfortunately inflation is a part of our lives and unless you as the landlord are issuing Rent Increase Notifications, you alone are absorbing the ever increasing operating costs which eat into your cash flow and thereby reduces the market value of your property.

Paul Kondakos is a seasoned professional investor and writer at realtyhub.ca

From Canadian Real Estate Wealth: http://www.canadianrealestatemagazine.ca/news/item/1394-an-investor-how-to-on-raising-the-rent