Should you raise rents after you buy?

Question

A 6-Unit property just purchased and the rents are low but the tenants are good. Did not want to raise rents but now that I'm trying to refinance the lender says it doesn't "Cash Flow". Would you raise the rents or shop harder for a better lender? Or both.

Patti Robertson · Answer

Did you buy with short term money? Just wondering why you need to refi after just purchasing a full occupied building. If a rehab isn't needed it's a lot easier and way cheaper to just buy with your permanent financing. What we generally do in this situation is to have each tenant complete a rental application after we close. We tell the tenants we need to know who is in the building, what their sources of income are, etc. We don't pull their credit or charge them an app fee, but this will tell you how much they can afford to pay in rent, which will give you your options. It will also assist you in collections should you need to go that route. Also, you want to have the tenant's signature giving you authorization to make credit and background inquiries for the enforcement of the lease, which should be one of the permissions they grant on your application. Your ultimate goal should be to maximize your income and have staggered expiration dates, which will minimize the risk of having multiple vacancies at the same time. Then set a strategy based on the current lease expiration dates, making only one move at a time, if possible, to keep your cashflow going as you turn units. After the first two months you will know if you have non-paying tenants. Those will obviously be priority #1 to issue non-renewals to and/or persue eviction, depending on the lease ending dates. Tenants who have strong income and pay, offer stepped up increases with multi-year terms. Tenants who have income under your criteria, leave MTM so you can give them notice one at a time. Have leases renew MTM as you work through your plan. Your priority list may change as you interact with the tenants. People who don't pay or who are downright rude and hateful get moved to the top of the list. Congrats on your purchase!

Aaron W. · Answer

@Kurt Grossman You should try to raise the rates to keep them in line with the market. Tenants know when they are not paying market rate and should not bat an eye at it. I agree with the other comments that you should also shop around to find other lenders and also take a look at their underwriting to see if there are any discrepancies. I have used pro forma cash flow before to show the lender the property , while vacant, had the potential to cash flow well enough for a loan.Best of luck!

Jeffrey Donis · Answer

As mentioned doing both would not be a bad thing. Some renters might want to see some kind of improvement or reason for the rent being raised or they could end up leaving. If you are looking to keep the good ones this is something I would keep in mind.

Joe Splitrock · Answer

@Kurt Grossman if the units are below market rent (taking into account condition), I would raise rents. Of course just because a property doesn't cash flow, doesn't mean rents are low to market. You could have high expenses or you may have overpaid for the property. Raising rents when the market doesn't support it can result in higher vacancy. Without knowing your property or market, it is hard to say what to do.

J. Mitchell Bernier · Answer

@Kurt Grossman As mentioned earlier give the lender a proforma of rents based off market. I require it every time to just see if there is potential to raise rents for my customers. And if you are strong enough financially personally, then shouldn’t be a problem. As for raising the rents on the tenant, if it’s like 100-200 less than market I wouldn’t immediately raise it to market. I would raise it by 25-50 bucks a year. Cause yes you will get more rent maybe on the next tenant, but turnover is on average going to cost a thousand so keep that in mind as well. Good luck!

Spencer Gray · Answer

I would probably do both. What's your cash on cash looking like as is?

Mason Hickman · Answer

@Kurt GrossmanProbably a little of both. See if the lender will base their underwriting off of proforma rent increases. If not, shopping for another lender could be worthwhile. Also look through their underwriting assumptions to see where you and the lender diverge on assumptions.