increase the rent?

Question

Hi!
   I am buying a $140,000 3 bedroom two bath duplex.   All comparable  rents in this area on craigslist (and the zestimate for rent) are 750-900 dollars.   There is a woman in one of the units that is only paying 625.     My question is, when her lease expires, should I increase her rent?

If so, I am sure I could get a renter who pays $800, should I increase it to that?  Or should I go halfway?  I have heard that there is value in a renter that stays put, pays on time, and takes care of the place.  Should I leave it alone?

Some related facts:

She had been paying 600 for the last 7 years and last year (I assume because they wanted to sell the place) and the rent was just increased to $625.

The apartment is in good shape but may need new carpet or floor.

We will make three thousand after the mortgage payments without increasing the rent.

Thanks for you opinion!

Diego A. · Answer

Hi Adrian Tilley, I don't think the posts above meant that you should not raise the rent but to consider what the market is dictating and your current situation (money on hand for upgrades, for example).
I agree with your post that $2100 could be huge but what about if the unit with a tenant that has been there 10 years  needs $3,500 for repairs, a make ready and updates and you don't have it immediately? Then it might not be such a good idea if the tenant leaves. Also, what about if it doesn't rent as quick as you hope for (for any reason)? These are all questions to keep in mind.
However, like I mentioned before I did raised the rent and had great success with the unit because I had the unit updated and the hire rent (in fact I made sure the extra rent would cover the upgrades within the first year).

Adrian Tilley · Answer

I'm a little confused by the above posters - if the market will support the higher rents, that is, if you can find a tenant without undue delay, I'm not sure why you wouldn't raise your rents to at least the low end of market value.  Otherwise you're giving up $2100 per year in cash flow.  That's huge.  I understand the value of having a long term tenant in place, but they should understand the reasoning.  You probably want to phase in the increase, maybe over a year or 2.  If the rents really are market rents, the tenant won't be able to find a similar place for better money.

Pat L. · Answer

We just inherited a 14 yr tenured tenant & a 5 yr. on a good buy & our property manger immediately raised the rents 30%.
They agreed without issue or any demands. I bet they know the rental mkt better than we give them credit for.

Miguel L. · Answer

If the unit in question is in "good" shape and would command the average market rate for your area by all means go ahead and increase the rent. I recently purchased a duplex and in one of the units I inherited a 10 year plus tenant. The tenant's rent was around $250.00 below the current market rents. I meet with the tenant and explain to him that I was increasing his rent - it went up $60.00 per month - and that I was willing to give two months notice before the rent went into effect, even though the contract called for 30 days notice.  You need to be prepared to lose the tenant or if they decide to stay and pay the new rent, must likely they will ask you do to repairs/improvements. The later was my experience and I was happy to comply since I knew the repairs needed to be done. In my case it worked out well, I keep a responsible tenant but I also increased my cash flow which I'm going to need for future maintenance.

Diego A. · Answer

Hi Andy Young, I have to agree with Jeff. It really depends on what you want to do with the property AND how your market works. I had a similar situation in one of my units and decided to raised the rents because the unit was falling really far behind to the market rate and the other units (even if my plan was to hold the unit for a long time). This idea work in my situation because the unit is in a college town and there is always a lot of demand for the units.

Good luck!

Jeff S. · Answer

Andy Young, a long-term renter is an asset.  And if you are okay with the current level of positive cash-flow then why take on the risk of an unproved renter filling their unit? I think the cost/benefit is all relative to your plans for the property.  If you plan to hold on to the duplex indefinitely then this renter is a boon.  If you need the additional cashflow or are improving and re-selling in a short time period, maybe it's worth increasing the rent?