Fully Occupied--When to raise rent?

Question

I have a 15 unit apartment complex that I purchased at the beginning of the year. Most units are paying $550-575. I turned over 4 units so far and raised rents to $700. The other 11 units are still paying low rent (that's why I'm fully occupied). I have made many changes to the exterior (new roof, paint and landscape). I've been waiting for tenants to move out so I can turn over the units and raise rent, but no one moved out for the last 2 months. My questions are:

-When should I raise rent (hopefully get people moving or at least compensate for the improvments)?

-By how much would you start to move rents by?

I'm thinking of raising the older tenants (11 units) $50 soon.

What do you guys think?

Thanks,

-When should I raise rent  (hopefully get people moving or at least compensate for the improvments)?

-By how much would you start to move rents by?

I'm thinking of raising the older tenants (11 units) $50 soon.

What do you guys think?

Thanks,

Josh Stack · Answer

Hey @Andy S.,

Congrats on your apartment complex and the value add you have already but into it.  Sounds like you are off to a great start.

Looking at this from a purely business perspective, you owe it to your business, your partners, your investors to maximize the revenue coming into the company.  Knowing nothing about your market, if you have done a good job screening and lacing your new tenants, the market clearly supports rents at the $700 price level - now it's time to get a plan in place to get the rest of the occupants up to this level.

Consider making a plan for getting the rents to market level over the course of six months or a year - whatever time period best suits your risk tolerance and go for it.  Some owners would send rental increase letters to all tenants the first day and take the risk that they have some turnover and vacancy as a result.  Make your plan, map it out, understand the financial impact that some vacancy, turnover and unit refurb costs will have on your cashflow and decide the pace that's right for you.

With a staged plan to raise rents slowly or force some turnover by not renewing existing leases, I'm sure you can get the rents up to market within six months to a year.

Good luck!

Ed Matson · Answer

I think Josh makes good points.  Assuming the market rate for these units is $700, and the area's vacancy rate is low, having a goal to get all units to or very near market rates is the way to go.  The question is how best to get there.  I am a fan of the incremental approach as it gives you a chance to test the impact on vacancies of the rent increases.  Your $50 increase is just under 10% of existing rent levels, and would put you about 13% less than the $700 goal.  An increase of $140 might create excessive vacancies.  Based on the reaction from existing tenants (or not), you could implement a second increase a further six months down the road. We have 46 units outside of Portland OR and found last year that older tenants were paying about 20% less than new tenants because we raised the rents for new people faster than existing tenants. We recently increased the rents of these old units by about 10%, leaving them still 10% under market, which we felt was appropriate for good, long term tenants, and for avoiding turnover costs. We had about 10% of the affected tenants move out after the increases and filled them at market rates with new folks. We felt this method minimized the potential for income disruption while still getting us closer to market rents for the longer term tenants.  I know this is a relatively conservative approach, but it has served us well.

Andy S. · Answer

Thank you everyone for responding!

@Josh Stack Great advice! I'm targeting 6mo to 1 yr.

@Ed Matson I like your method of incremental increase in rent. The last thing I want is a lot of vacancies. Plus, the current tenants right now are pretty good and always pay on time. Thank you!

@Abraham Anderson Awesome job on your 20 units! I think I'll start out similar to you and raise rents on 5 units and see what happens.

@Alina Trigub yes, most of the old tenants are MOTM. Thank you for your advice!

@Anthony Wick yes, month to month. The units are pretty old so the cost to turnover is running approx. 4-5k. Thank you!

Alina Trigub · Answer

@Andy S. Congrats on your 15 units p acquisition this year! Do you tenants have leases or are they on MOTM (month to month)? If the answer is the latter, then you have the ability to raise rents  based on the local laws. So I'd check locally 1) whether there is rent control 2) how long in advance should the tenants be given notice about the rent increase.

And then do it gradually to avoid vacancies.

Abraham Anderson · Answer

I recommend spacing the increases in case of vacancies. Since last August when I took possession of the 20 unit, I began raising rents 2-3 units at a time, and now everyone is at the higher rents (average $140 per unit).

In your situation it sounds like the rents haven't been raised for a while, coupled with your improvements the tenants expect there to be an increase. The worst that will happen is a 1 month vacancy, so go for it!

Fully Occupied--When to raise rent?

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