Question About Raising Rent

[Cole Oliver]

Hello! I am curious to get feedback from everyone about this situation I have found myself in. I am currently under contract on a property that has 2 duplexes (4 units) and shop buildings on it. The seller of the property built them back in the 90's and paid in cash for them. 

When running my numbers I got the current rates that he is charging, and they are 30-40% less than the fair market rent value in my area. He has two 3B 2.5B units rented out for $1,050 and $1,100, and 2B 2B units rented for $975 and $1,000 each month.

Based on my experience in my market the 3B 2.5B units should be renting for $1800-2000/mo and the 2B 2B units should go for $1300-1500/mo.

Tenants are currently on a month to month lease so raising rents won't be a problem, but how much would you raise it to?

Our contract states that I will give the current tenants 60 days notice from the day of closing that rents will be raising, but would it be too much of a jump to raise rents to $1600 for 3B units, and $1300 for 2B units? I figured I would give current tenants a better rate for a year, but if they decide to move then I'll market at the top rent rate. What are your thoughts?

[Bill B.]

Easier to just non-renew them. Anything less than market is like you giving strangers a cash gift every month. You can’t complain about 20% under market and then target 10% under market. Anyone buying from you would say this fool was 10% under market, I’m raising rents. Even at jus 8% under market you’re better off with a months vacancy and then getting market rate. 

You are telling other strangers you won’t let them pay $2,000/mo because other strangers are paying $1,000 or $1,500 if you go up half way. Think about how dumb that sounds and raise rents to market. What are they going to do? Go through the hassle of moving so they can go pay $2,000 (market rent) somewhere else?