The good news is your landlord offered to renew your lease. The bad news is they slapped you with a huge rent increase. Lots of thoughts are probably spinning through your mind right now. Besides the anger you might feel toward your landlord, you might be wondering what the average rent increase per year is anyway.
The average rent increase per year
The average rent increase per year is, give or take, somewhere between 3% and 5%. For a monthly rent payment of $1,500, for example, we're talking between $45 and $75 more per month.
Let's say your current rent is $1,500 a month. You're really obligated to pay your landlord $18,000 if you sign a year's lease, and that sum breaks down into 12 monthly payments of $1,500. With a rental price increase of 3%, you'd be obligated to pay $18,540 for the year, and with a rent increase of 5%, you'd owe your landlord $18,900 for the year.
Of course, how much the median rent costs in the first place and how much the rental market increases from year to year largely depend on the location and size of the rental unit.
Average rent prices across the country
Nationally, the median rent in 2019 for a one-bedroom apartment was about $1,060 and about $1,315 for a two-bedroom apartment. The three most expensive places to rent were Washington, D.C., at an average price for a one-bedroom apartment of $2,516; Massachusetts at $2,218; and Hawaii at $1,880. The most economical (aka cheapest) places to rent were West Virginia at $637, North Dakota at $672, and Oklahoma at $680.
When landlords can raise the rent
If you have a lease with a start date and an end date, your landlord must wait until your lease ends before raising the rent; they can't just arbitrarily raise the rent mid-lease. If you're a month-to-month tenant, your landlord can raise the rent after giving you the proper notice for your state, usually 30 days. If you're in a rent-control situation, your landlord needs to abide by rent-control laws regarding when and how much they can raise the rent.
Why landlords raise rent
Believe it or not, property owners aren't just kicking back behind a big desk all day counting all the rent money pouring in. It's true that landlords are in business to make money, like any business owner, but landlords do not get to keep all the cash that comes in. They have many real estate expenses, such as property taxes, landlord insurance, repairs, and maintenance, and they could have additional costs tacked on besides those, such as a mortgage payment, utilities, homeowner association dues, and property management fees.
When expenses go up, if the landlord doesn't increase rent, it's akin to them taking a pay cut, which is sometimes a necessity in business, but never the goal. If your landlord increases your rent between 2% and 5% each year, your landlord is probably not price gouging.
What to do if you get a rent increase
If you get a legal rent increase notice, which comes at lease renewal time or after proper notice in the case of a month-to-month tenancy, you will probably need to pay it. It's usually either that or move. And you might need to add whatever that increase is to the security deposit, since the security deposit is normally equal to one month's rent. But you can always try negotiating with your landlord. If your rent goes up $75, for example, why not ask if your landlord would consider a lesser increase if you agree to sign a longer lease?
If you're a good tenant, one who pays the rent on time and abides by the lease terms, your landlord will probably want you to stay for as long as you like. In fact, some landlords don't raise the rent every year, particularly when they wish to keep a good tenant.
It's a lot of work for a landlord to get a new tenant in, whether in an apartment or a single-family home. The process includes getting the property ready, advertising, showing, screening, and then hoping the new tenant will be as good as you've been. So use your good standing to your advantage when working out a deal with your landlord. Besides, it never hurts to ask.
Some places experience a rent decrease
It's unlikely that a landlord would ever decrease your rent from one year to the next, but if you were to move from one rental to another in a city undergoing a decline in rent prices, it might be worth your while to move. The cities that saw the biggest rent decreases in 2019 were Dayton, Ohio, which saw a 4.11% decrease; Las Vegas, Nevada, which saw a 2.55% decrease; and Los Angeles, California, which experienced a 2.27% decrease in rent.
And who knows, if you let your landlord know that you plan to move because the rent is too high now compared to rent decreases in the area, they might lower your rent to keep you.
Landlords taking advantage of tenants
Some landlords, knowing what a hassle moving can be, take advantage of that fact by hitting you with a huge rent increase at lease-renewal time, such as over 10%. Your remedy would be to move, of course.
But you could try hitting back. Check what units comparable to yours are renting for by using the search terms, "rentals [your city or ZIP code]." If your landlord is charging more than the going rate, consider using your market knowledge as a negotiation tool.
Rent control and rent stabilization
Some states or jurisdictions in America are under rent-control laws, which are largely being phased out for rent-stabilization laws. Rent control and rent stabilization are meant to keep landlords from springing steep rent hikes on their tenants. Rent control typically puts a cap on rent increases, and rent stabilization generally has yearly limits on how much a landlord can increase rent each year. The intention of both is good, and many tenants benefit from rent control and rent stabilization, but rent stabilization, in particular, doesn't always mean tenants are getting the best deal.
How rent stabilization can cause overcharging
The funny thing about rent stabilization is that a long-term tenant could actually be paying more for a rental than market rate rent would allow. Here's how: When landlords can't operate under the free market, they tend to charge whatever the government allows. If the government automatically offers an allowable rent increase every year, some (maybe even most) landlords will take it. This can lead to a situation in which a landlord is actually charging more for rent than what the market will bear.
Say the landlord has neglected to upgrade the unit over the years. There was really no incentive to upgrade if the tenant remained and rent stabilization allowed yearly rent increases either way. But if that tenant were to move out, the landlord could find that no one will rent it for the price they had been charging. The landlord would either need to lower the rent or make upgrades.
Rent increases tend to follow what the market will bear
What really regulates how much landlords can increase your rent per year is the housing market. Assuming you are not in a rent-controlled or rent-stabilized unit, you have the free market to keep your landlord honest. Landlords know if they raise rent too much, they could very well lose a good tenant: you.
Here's where some landlords go wrong: trying to charge based on making a certain profit. This can happen if charging well over market-rate rent was the only way a landlord could make a profit. If that is the case, the landlord has probably not made a good investment.
Landlords who charge based on what they want to get are like home sellers who price their home based on how much money they've put into the home over the years. These types of sellers might be in for a rude awakening, as the price a home seller can get for their home is only what someone is willing to pay for it, not what the homeowner spent on it.
Rent works the same way. A landlord can only get as much rent money as what someone is willing to pay. If a landlord's expenses go up, it's understandable that a rent increase is on the horizon. But that doesn't give a landlord free rein to hike the price to astronomical levels. That landlord would likely have a vacancy on their hands.
The bottom line
It's in your best interest to know what other landlords are charging for rental property similar to yours. That gives you some negotiating chops if your landlord hits you with a huge rent increase. And if your landlord is charging too much and won't budge, you can always move.
Don't just survive a market crash: Thrive!
It's hard not to get swept up in the panic when the stock market is going crazy, but it is a lot easier if you're invested in real estate. Not only can you benefit from the incredible returns real estate offers, but you can also do so with half the volatility.
That's why we launched Mogul, a breakthrough service designed to help you take advantage of this critical asset class. Mogul members have been receiving investing alerts with projected rates of return of 16.1%, 19.4%, even 23.9% as well as cash yields of up to 12%! When you invest in stable, multiyear real estate developments, the value of these investments aren't subject to the wild swings of the market.