How to raise under market rent for a 4 plex in Bridgeport?

Question

I am closing on a 4 plex in Bridgeport, all units are 2 bed 1 bath, and the current rents are under market at $600 against a fair market rent of 1200+. All other 2 beds in the neighborhood are renting for 1200+ so I know it's a fair price.

I will be introducing myself as the new landlord soon and I'm nervous. I was thinking to increase rent by 200 over the course of 3 months to get to fair market price. They are month to month and are free to leave which is even better because I would like to renovate the place 1 unit at a time.

Does anyone have experience handling raising under market rent?

Robert Rixer · Answer

Raise them to market rate ASAP. Charging only $800 for $1200 market rent is no different to pulling out your wallet each month and handing them 4x $100 bills. No one would do the latter but for some reason a lot of people are okay with the former.

They will likely not be happy with the rate hike but when they look at the options on the market, they'll realize they are still probably better off not moving.

Justin Moy · Answer

If they are MTM you are free to increase or modify their lease terms. The thing with 4 plex tenants is they talk right away, so when one gets a hint you're raising rents they'll tell the others.

Keep that in mind as you'll want to treat all the tenants the same instead of potentially raising one persons rent more than the other.

Overall I'd be transparent with the plan and give them a few options. They can continue living in their classic units for $X amount per month and you can agree to slowly raise it over time.

Or they could potentially agree to a live in renovation and renew at a higher rate.

Just be transparent and give them a flexible timeline, then be ready to move fast because my gut tells me they'll all move out pretty close to each other

Sean Wagner · Answer

I also own property in Bridgeport Kevin. I am from the neighborhood and know it well.

If all tenants are on month to month leases, you need to give 60 days notice to vacate or increase rent in Chicago, per the RLTO. If they have lived there for more than 3 years, it is 120 days. I would send a letter out to tenants letting them know of the change of ownership and include a tenant update information form with it as well. Make sure you ask about employment on this form, as this information can help you determine which tenants may be able to afford a rent increase and which tenants may not.

Then do unit inspections, with 48 hour notice, and gauge the condition of the units, the cleanliness, etc. Determine which units need work done to get them up to market rent, which tenants may be a future problem, and which units you can simply increase rents without major upgrades.

Depending on where you are located, the size of the unit, etc. you may be able to get up to $1,800/month in Bridgeport for a 2-bedroom. We have 33 units in Bridgeport and Canaryville and our average 2 bed rents for $1,500/month.

Shoot me a message, would love to chat more about it.

Kevin L. · Answer

Wow this makes a lot of sense. Even if I raise it from $600 to just under $1200 in the span of a month the tenants have no where to go because I will still have the cheapest rent in a 5 mile radius.

Though, I don't want to be too harsh as I have been in their shoes before, I will work with them on the rent raises.

Julia Lyrberg · Answer

Congrats on closing the 4-plex! It’s totally understandable to feel nervous about raising rents, especially when they’re so far below market. Your plan to increase by $200 gradually seems reasonable, and it gives tenants time to adjust. Since they're month-to-month, it might be worth having a respectful conversation, explaining the market situation and any improvements you're planning to make.

Some tenants might leave, which could actually work in your favor if you're looking to renovate each unit. Just be clear and fair in your communication, and let them know that while rent is increasing, they’re still well below market.

Paul De Luca · Answer

@Kevin L.

I think most tenants understand when a building is sold they can expect some changes, which usually includes rents going up.

It's up to you on how you would like to handle the situation. You could give notice of non-renewal to one or more of the tenants, renovate those units, and then incrementally increase the rent of the other tenants. Usually rents are below market due to (1) long term tenants and (2) the units are worn and need some updating. Since you need to make some improvements to get the rents to market levels, it could make sense for you to inform all of the tenants you will not be renewing their leases so you can fix all of the units at once and then get them rented.

Whichever option makes sense for you will depend on your cash flow/cash position. How much vacancy can you handle? How long will the renovations take? Some things to think about.

When I have inherited tenants, I prefer to have them out as soon as possible so I can get the rehab done.

Whatever you decide to do, inform the tenants in writing.

Jonathan Klemm · Answer

Let's go!  @Kevin L.!  Congrats on your upcoming Chicago 4 unit closing!  I really like @Carl Millsap suggetions!

First off, being nervous in this situation is normal, but I have found that the more direct and transparent you can be, the easier the situation gets.

Are you saying you will raise the rent $200 each month for 3 months straight?  I highly suggest against that and just doing one larger rent increase to $1000, but if you are only trying to do one unit at a time, make sure you don't try to make a drastic increase to all 4 tenants if you can't afford for all 4 of them to be out at once.

I'd consider showing them some data on comparable rentals and let them know you are trying to improve the building by renovating the units.

Gino Barbaro · Answer

@Kevin L.

If you think that you are going to raise rents by $600 over the course of a year, it will not happen. They have been conditioned to pay $600. In our experience, if rents have to go up that much, then non renewals is the much easier route.

It is a big challenge to raise rents that much to existing tenants. This has been their home, and they know they've had a great deal. No matter what you say, they will feel entitled to continue to pay. And there is no way that you can run your business with $600 rents, but that is not their concern.

The only way to know for certain if you can achieve those rents is if you put one on the market and test it.

Gino

John Warren · Answer

@Kevin L. be prepared for the emotions from your tenants. This is a people business ultimately, and I can guarantee you that a paying tenant won't be thinking about the "savings" over the years on cheap rent. Most of them are there because of the cheap rent and won't be able to afford other places. I always go in with a simple offer of this is the rent, and we are also comfortable giving you a (insert something you need to do anyways like a basic, white paint job or a new appliance).This is one of the most uncomfortable parts of the business though, and the quicker you get over being able to have these conversations, the quicker you will be successful in this business.

Garfield M. · Answer

$1200/month for a 2 bedroom in bridgeport is still a great deal for a tenant. A nicely renovated 2 bedroom with a decent layout can get you $1800 pretty easy. Smaller 2 beds can still fetch around $1400. Unless you have very small apartments or with strange layout, I think you should be shooting for higher rents in this neighborhood which would probably make the decision for you to just go ahead and get the rehabs done before next year's high demand rental season. Just my two cents.

How to raise under market rent for a 4 plex in Bridgeport?

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