How Did You/Do You Raise Rents On Small Multifamily

Multi-Family and Apartment Investing
9yFollow

How Did You/Do You Raise Rents On Small Multifamily

Brandon Cravens
Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes

I purchased a 9 unit multifamily in Tacoma last year. Almost all the units are below market rent, especially considering the recent improvements. The only unit that is not below market rent is the one that we just rented out this month at full market rent.

The previous landlord did not go up on rent for YEARS. Some people are 10 year plus residents, probably in part due to the cheap rent.

My property manager has suggested that I send out a letter at the beginning of March describing what the rental increase will be and that it will be effective April 1 and require a new one year lease (6 tenants are on month to month) his reasoning is that if we are to have vacancy it is best in the spring/summer. I agree with him.

How have y’all done this? Did you go up to full market rent or some portion thereof for existing tenants? Can anyone share with me a rental increase notification letter

0Reply
65 views

Most Popular Reply

Douglass Benson
Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes
9y

I will be the contrarian here.  I invest in multi-family to both improve the community where my buildings are located at and to also improve my own financial position.  I purchase buildings all the time due to their being under performing assets.  If the previous owner didn't raise the rents in 10 years, that is why I now own the building.  

Send a letter to the tenants telling them that all vacancies will be turned over with an expectation of market rents for new tenants.  Publish what those rents are and indicate that you will be moving all rents to better align with the market.  Assuming that everyone is on a month to month lease, my first rent increase will bridge 50% of the gap between current and market rents.  For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates.  Your new tenants should be the best of the best so you can set a precedent for who gets into your building.

For everyone that remains, three months later I will again bridge 50% of the gap between current and market rents.  For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates.

Lather, Rinse, Repeat until the entire building is at market.  It is your asset, you owe it to yourself and to the rest of the community for it to be as valuable as it can be.

4Reply
See this reply in the discussion

34 Replies

Jump to latestLatest
  • Jeremy Pakalka
    Houston, TX · Member since 2016 · 349 posts · 142 votes
    9y

    @Brandon Cravens I would recommend moving forward on the rent increase as long as it is a substantial increase. I would not want to lose tenants that have been paying for years over 50 bucks a month increase. You have to look at it as a business decision. 

    0Reply
  • Brandon Cravens
    OP
    Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes
    9y

    @Jeremy Pakalka, just to give everyone a sense of how low some of the rent is, we just turned around a two bedroom in one week that rents for $725. Their is an identical two bedroom that is month to month for $450. Do I go up to the full market $725 or do it in steps?

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    Personally, when you have 100% occupancy with good tenants - - VALUE them.  Make adjustments that you anticipate they will not object to -- say 5-10%.

    Secondly stagger the changes (say 1/2 this month and the other 1/2 in two months) so that you don't expose yourself to mass move-outs.

    1Reply
  • Sam R.
    Investor · Bothell, WA · Member since 2015 · 88 posts · 55 votes
    9y

    Shouldn't you be relying on your experienced property manager to send the letter? I just ask the property manager. How it happens after that, I have no idea. The managers have a letter template they use, but I have never seen it.

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    The rents are so low you are going to lose most of the tenants regardless of how you do it. If you want to space them out you could but my preference is to talk with each tenant and explain what market rent is for the unit and tell them you must raise to market. For those that want to leave you give them a 2 month ( what ever time works) reprieve allowing them to stay at their present rent till they vacate at the end of the agreed to time period. This allows you the time to find replacement tenants without a vacancy. 

    This methods gets all units quickly to market without vacancies. If there are several that do not want to stay stager them out.

    2Reply
  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    9y

    I agree, with good tenants it's not always about maximizing rent. There is significant value in a tenant who pays $500 on time every month, makes his own minor repairs, and doesn't damage or place or complain, vs a $700 tenant who is always late, makes emergency calls all the time, damages your property, causes problems with neighbors, etc.

    Unfortunately, you can't raise one person's rent $50 while raising a similar unit a full $200. Tenants talk, and you may find yourself in court for housing discrimination. Find a happy medium where your current tenants will stay and your problem tenants may consider moving.

    1Reply
  • Jeremy Pakalka
    Houston, TX · Member since 2016 · 349 posts · 142 votes
    9y

    @Brandon Cravens Take it to 725, assuming you can find another tenant in reasonable time given the market. I would consider 675 for a long time tenant that has a great track record of paying on time. That is literally money coming out of your pocket so someone else can live there. I would not be in the habit of paying other people's rent out of my own pocket.

    1Reply
  • Tyler Ansell
    Investor · Tampa, FL · Member since 2015 · 293 posts · 175 votes
    9y

    We raise generally 3-8% depending on how far below market they are. Across the board if they are say $0-100 below we'll raise 3%. $100-200 might get 5% etc. 

    A good PM should be able to get your tenants to stay or quickly fill the vacancy with an increase. There are countless ways to pitch rent increases and get people to sign.

    0Reply
  • Brandon Cravens
    OP
    Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes
    9y

    Some of you have mentioned risk of vacancy as potential downside of raising rents but my own market research and the advice of my property manager that I trust, has indicated that the vacancy risk is minimal. Demand is super high in the area. 

    Also, while some of the tenants are ideal a few are chronically late and one extra benefit of the rental increase is to install a regimented system of accountability for paying rent. In other words instead of getting January rent in February and February rent in the middle of the month (this happened), I want to have rent due on the first, late on the 3, and eviction notice posted on the 5th. 

    1Reply
  • Mike Nelson
    Investor · Oak Park, IL · Member since 2014 · 307 posts · 150 votes
    9y

    Since you already successfully turned over one unit for $725, you have strong evidence the units are actually worth $725, as well as the amount of response and demand for the units.  This is a good solid benchmark on how you move forward.  You will need to consider the time and money required to turn units over, and the probability of several units being available at a given time.  To some extent, it is a calculated risk as to how many are vacant at once.  Tenants should generally expect a new owner to raise rents. The big picture is it looks like an opportunity for income growth.

    1Reply
  • Tyler Ansell
    Investor · Tampa, FL · Member since 2015 · 293 posts · 175 votes
    9y

    Like @Mike Nelson mentioned, need to determine ROI for renovating units and the subsequent rent increase.

    For example, if it took $1500 to get a $100 per month rent increase then your ROI would be 80%. However, if it took $10,000 to get $100 more per month then you are only looking at 12% ROI.

    Something to consider.

    1Reply
  • John CasmonPro Member
    Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
    9y

    Take the rents up to market rates, but stagger the role out so you don't have a bunch of vacancies at one time. Respect the tenants who have been there the longest and give them more time to figure out if they can/want to stay at the new rate. You may even want to give them more of a break on rents to stay. 

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Hey Brandon. There are many strategies around rental increases when you are re-positioning a property and whether to take the rent up in steps or all at once. There are also things you can do to add value, justify the increase and attempt to retain a small portion of the tenants, for example, take care of any deferred maintenance on the exterior and interior of the units. In your case though, the increases are so steep that the plan is clear to me,,,go straight to market rent. You will loose all the current residents and a $450 resident is in a totally different tenant class than a $725 resident. The amount of money that you leave on the table for moving rents up slowly in this case is substantial and you will also have a lower tenant class for years. If you plan to refinance (or want the equity on your personal balance sheet) after the re-positioning, that makes it even more of a no-brainer as the value of property will be determined by it's NOI. A $275/mo increase is a $35k or so increase in the value of each unit...well done!

    2Reply
  • Rich N.Pro Member
    Investor · Haverhill, MA · Member since 2015 · 761 posts · 328 votes
    9y

    @Brandon Cravens

    I agree with others. You need to raise them a significant amount.  If the current rent is 725 and your at 450, that is a loss of money to your business and you!

    You do not want them all vacating at the same time, so stagger them like 2 a month. Start with the ones you want out because they are bad.

    I had it where tenants left for $75 a month increase and yet I have had tenants stay with a $200 increase. 

    0Reply
  • Brian Garlington
    Realtor · Oakland, CA and a Real Estate Investor with Multi-Family Units and a Self Storage Facility · Member since 2016 · 2k+ posts · 2k+ votes
    9y

    @Brandon Cravens

    First......check you local lawa and make sure you don't have rent control or protected tenants.......if all is good...........Take it to $725 on all units.............

    $725 - $450 = $275/mo..............times 12 mos in a year equals $3,300 a year times 8 units equals $26,400 a year YOU are missing out on.

    By the way.....once the people that are paying $725/mo realize that there are others paying $450/mo ............and that they are the only ones paying this you will have extreme animosity from the tenants you just put in.

    Generally............not always.........but generally..........tenants that give you problems are NOT the tenants youput in, but the tenants you inherit.

    Have the property manager put together a nice professional letter to the other 8 units explaining how as the new property owner......you are coming up with a new lease and that includes bringing everything to market rate. 

    Some may actually stay.......Most probably won't, but.....once they move out .....and give them 30 to 60 days to move out .....then you will be able to get "your own" tenants in there ............at market rate. 

    2Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    Your advice is to keep your rents 40% below market to keep on time rents and tenants who don't ever call you because they know their rent is 40% below market?  Yes, there is significant value in doing this....to the tenant, not the owner, in paying 40% below market rent.  Those are the types of owners and mismanaged properties that many investors on BP target for acquisition and adding market value through proper management of the asset.  Keeping rents slightly below market to manage vacancy is not out of the question but 40% is nowhere near slight.

    1Reply
  • Aaron NelsonBusiness Member
    Real Estate Agent · Seattle, WA · Member since 2016 · 307 posts · 191 votes
    9y

    Agree with @Brian Garlington 

    How many years do you want to throw $26K out the window? You bought the property as an investment and should work to maximize your returns, just like any for-profit business. That said, try to be fair and understanding of the tenants who will be impacted. 

    My friendly suggestion: Research market rent in the area (it sounds like you already have) and consider raising rent to a little below market rent...maybe $675/month. Inform the tenants of the pending change stating it is your policy to review rent amounts annually and make adjustments based on the market. Give them more notice than what it legally required (perhaps two months) before the increase goes into effect. Tell them you're giving them extra time to be sensitive to their situation and so they can look around at other options and decide if they want to stay. Mention that you've done your research and know they are still getting a good deal if they stay at $675/month. 

    Some of the tentants will still get mad and leave and you'll know that no matter what you would have done (sans keeping rent as crazy low rates), this was inevitable. Others will look around, realize that you've done your homework and won't want to go through the hassle of moving.  

    In a year, recheck market rent rates (since you've already stated it is your policy to review them annually) and consider raising the rent to the market rate. 

    [email protected]425-880-2580
    White Coat Realty534 Reviews
    WebsiteView Page
    1Reply
  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    9y

    My point was that it's not JUST bout money. I wasn't doing actual calculations, but if you get rid of a good tenant to raise the rent $200, and replace him with a bad tenant costing you $200 a month in service calls, repairs, time, is it really worth it? Of course good screening can mitigate SOME of this.

    When my rent was lower, I did things like replace lightbulbs in the hallway, make adjustments to the door closer to keep the door from slamming, installed a new peephole because the door installer painted over it with stain, picking up paper in the yard. I bought my own toiler auger when a plunger wouldn't work, replace my own igniter on the stove. Once my rent went up, I began to make service calls and complaints and have them come change hallway lightbulbs and outdoor lightbulbs.

    And that was just for $75 increase.

    0Reply
  • Ike Hobbs
    Investor · Wichita, KS · Member since 2016 · 133 posts · 63 votes
    9y

    There's a lot of rent increases in this area currently so you're tenants should be expecting something unless they're totally ignoring the market. Other than that, just remember to value the current tenants also and make sure you're not going to have a completely empty apartment this summer. 

    0Reply
  • Douglass Benson
    Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes
    9y

    I will be the contrarian here.  I invest in multi-family to both improve the community where my buildings are located at and to also improve my own financial position.  I purchase buildings all the time due to their being under performing assets.  If the previous owner didn't raise the rents in 10 years, that is why I now own the building.  

    Send a letter to the tenants telling them that all vacancies will be turned over with an expectation of market rents for new tenants.  Publish what those rents are and indicate that you will be moving all rents to better align with the market.  Assuming that everyone is on a month to month lease, my first rent increase will bridge 50% of the gap between current and market rents.  For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates.  Your new tenants should be the best of the best so you can set a precedent for who gets into your building.

    For everyone that remains, three months later I will again bridge 50% of the gap between current and market rents.  For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates.

    Lather, Rinse, Repeat until the entire building is at market.  It is your asset, you owe it to yourself and to the rest of the community for it to be as valuable as it can be.

    4Reply
  • Brandon Cravens
    OP
    Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes
    9y

    I am liking your approach @Douglass Benson! 

    Just so we are clear you are saying go up 50% of the market difference now, then go up the other 50% a few months in the future? Do you write this in to your lease? 

    0Reply
  • Brandon Cravens
    OP
    Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes
    9y
    Originally posted by @Ike Hobbs:

    There's a lot of rent increases in this area currently so you're tenants should be expecting something unless they're totally ignoring the market. Other than that, just remember to value the current tenants also and make sure you're not going to have a completely empty apartment this summer. 

     Don't feed into my anxiety @Isaac Hobbs! Thank you for the reassurance and the words of caution. 

    0Reply
  • Account Closed
    Property Manager · Boston, MA · Member since 2014 · 194 posts · 73 votes
    9y
    I raised rents for long term tenants at 2% some at 3% increments depends how how much do they take care of there common area. Like if there's a porch that you have to cross and if it's littered with junk raise it don't think about it twice.
    0Reply
  • Harrison Liu
    Investor · Seattle, WA · Member since 2016 · 143 posts · 68 votes
    9y

    I like the idea of raising 50% gap now and then another 50% later. My question is when you raise the first 50%, do you sign a month to month lease or a year lease? I can see pros and cons in either approach

    0Reply
  • Chandra Venkat
    Leawood, KS · Member since 2014 · 33 posts · 14 votes
    9y

    Brandon, 

        When I purchased a 24-unit the rent was way below market, lowest at $450 and an average of $497, and most were month-to-month. I did market analysis for rents and it was around 650 or so. We started with the lowest ones, I gave them 3 options, sign a year lease for $50 increase, month-to-month at $75 or end their lease. I had most sign the lease and 2 of them chose to go month-to-month. Then did the next tier ones the following month, had a similar success rate. and the following year was able to increase by another $50(or $75) again and was able to get the average up to $620 in little over a year, with some move-outs and newer ones starting at $675. I have had little to no vacancies, that helps. 

    Hope that gives you some ideas. 

    @Brandon Turner

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free