35% Rent Increase Worth It??

Question

My properties are in Tampa, FL and the market there is pretty crazy right now. I've had these properties for 11 years and have never seen so many people looking for properties to buy and rent.

The rent I'm charging is $1400 for a 3B/2Ba sfh. Similar properties in this area are going for about $2000 now on Zillow and facebook marketplace, which is where I advertise (correct me if I'm wrong, zipcode: 33612). Even if I aimed for $1900, that's a 35% increase from current rent (43% if I raised to $2000). I have three properties that I can raise to market value right now, giving me an additional $20,000 per year minimum. That's no small amount. I am also painfully aware of how difficult it can be to find a great tenant. My current tenants are fantastic. Pay on time and take great care of the house, as if it were their own.

I'm so torn on what to do:1. Place value in the current tenants being great, and raise rent minimally (if so, how much)?2. Focus on the business, raise rent to current value and deal with the fall out of likely needing to find a new tenant? Will I find people who make the required amount to afford this? (Why wouldn't they own their own house if they make this much?)3. Some kind of middle ground?

Secondary Question: One of the properties I can raise rent on is a 5 bedroom (plus office) property with a huge yard that is being used by the tenant as an AirBNB (yes, both me and the tenant are insured properly for this). They need to be able to make money from this property to make sense of renting from me, but they have taken the best care of the property I've ever seen. This neighborhood wasn't the best, so the people who would want to rent here in the past have not been the most ideal and I've spent tons in the past cleaning and fixing the property between tenants over the years. I feel like the neighborhood has improved some, but I still worry about whether I can find tenants to take good care of the house if I lost them. I could likely raise rent from $1700 to $2000, but not sure if it's worth it in this property in particular. It's in a different neighborhood than the other two.

Nathan Gesner · Answer

I am against small, incremental increases. There's a good chance you'll eventually reach a point that it's no longer affordable, then the tenant leaves anyway. There's also a good chance someone will mess up the schedule or that your tenant will build animosity towards you.

Get them out, raise it to market rate, and start fresh. In the future, implement small increases every year to avoid getting too far behind. My lease says renewal includes a 3% increase.

Sunil Kurian · Answer

As an earlier poster said, the following is all being said from a place of concern and not over-criticality.Accepting a $20k disparity in cash flow from the market is a luxury in and of itself...a luxury that your tenants are currently benefitting from...not you. In fact, the biggest winner in these circumstances is your "AirBnB tenant" who is probably growing their profit margin because their biggest expense is locked and under market. (What good fortune!)

I definitely understand the point about not wanting to lose good tenants but let's frame it differently: how many of us property owners would pay a tenant to simply stay put and not move? Under normal circumstances, probably not many. However, in this case that's exactly what you're doing to the tune of a cumulative total $20k you are just gifting to them. Moreover, when you're so far under market...you leave yourself vulnerable to the impact of an insurance increase or a tax reassessment by Hillsborough County. At that point you will be scrambling to find a way to make the numbers work. This is no way to live as a property owner! :)

Lastly, I realize that the Tampa markets have seen crazy appreciation but nothing is forever. The longer you are under market, the less attractive your property will be in the open market to other investors. Pricing investment properties can be a tricky thing but if you are 35% under market rent you are more than likely only going to be approached with "bargain"offers should you choose to sell. So by not raising the rent, not only have you lost recurring cash flow, you also risk losing money when you sell what could be seen as a less profitable asset.

I agree with Nathan G. That type of rent increase is just realistically not something that will go over clean with existing tenants without lingering issues. Every tenant is different but in most cases it's just best to run out the existing leases, clean it up, and re-market. If you are worried about the quality of tenant, there are plenty of services and resources available that can help or even take over that process for you. You're already losing $20k (of real money) so having to do some turnover repairs shouldn't dissuade you so much that you need to continue to prolong the shortfall. Wish you luck!

Greg M. · Answer

I disagree with "Get them out, raise it to market rate, and start fresh." There may be no reason to get them out.

Great tenants can be hard to find and there is a value in retaining them. Not a 43% value, but there is a value. There is some middle ground where you get a good business return and your tenants get rewarded for being great tenants.

We also don't know if the tenants can afford a rent increase. Maybe they're maxed out at the current rent? Maybe they could easily afford $3,000 a month?

Your tenants aren't idiots. They likely know what the market rent is. How about approaching your tenants 90 days before the renewal and discussing what is happening in the market. Tell them you need to raise it to $1850. You can do small annual increases after this. When I get pushback on increases, I use the "If I listed this unit on the market today, I'd be asking $2,000" and that usually quiets them. They know it is true.

Darlene Rajkumar · Answer

I have notified two of the three tenants that the rent is being raised. I've given the AirBNB tenants a 60 day notice, and the residential tenant a 90 day notice. I've offered them a lower rate than I would have if I were advertising to a new tenant, because I figured I'd lose 1-2 month's rent finding a new tenant, and reducing the rent by $150 from market value is only costing me about 1 month of rent. #cheapertokeeper

I'll do the last tenant after I have at least one signed lease because I can't afford to have three properties vacant at once. Thanks for all the advice! I can update on whether they sign or move.

Jake Wiley · Answer

@Nathan G.is right - It's hard to recover from rents getting too far behind.    There's definitely a balance here.    While it would probably work out naturally, you can test your hypothesis on one of the properties that is coming up for renewal.   If you let the tenant know early and then get the property on the market and get a ton of calls, you are on the right track.  A few months of vacancies will eat into that cashflow quick.

You are right that is not an inconsequential amount of money and as inferred from above it's a compounding issue.   If it took you 5 years to get the rents right, that's another downpayment you don't have, and another 20k per year etc.  Its not hard to see how that doesn't turn into 100k of missed opportunity pretty quick.   When you find you are way off course on rents, starting fresh is best.

Good luck and great place to be.

Joshua Adlam · Answer

Darlene, I am saying this out of love, you have to raise your rent. The $20,000 you are missing out on is $20k that could go to your family time on a vacation etc. If you have a property manager you should have no problem finding a great resident. There are tons of great residents out here.

Trust me there is someone extremely qualified prepared to pay market value to rent your space.

On the airbnb side as well, they are using your property to fund their lives. You need to win as well. Their business has nothing to do with yours, you need to make money as well. You've put hard work in acquiring these properties and you should reap the reward.

I'm not telling you to do people wrong or be rude, because you still have to be a good human. I am simply saying to do what's right for your business and what's right is increasing the rent to market value.

Greg M. · Answer

Your local laws will dictate how long you have to give them. Most (not all) places are 30 days for a rent increase. Some require longer depending on how long the tenant lived there and/or how much the rent is increasing. I suggested 90 days in advance as if they can't afford it you're giving them enough time to find a new place. Personally, I'd still do 90 days since you let the lease lapse.

Darlene Rajkumar · Answer

@Nathan G., @Jake Wiley, @Joshua Adlam - Thanks for the advice. I do comparisons before setting rent amount, and raise rent annually 3-5% during lease renewals, BUT the market has jumped recently. I was doing my comparisons before renewing and saw how high the rent is now, it's pretty crazy.

I heard you all loud and clear, I need to get the market value. I'm going to post a test ad on facebook and see how much interest I get at the increased price, but I'm wondering, what do you think about giving the tenants the choice of signing a lease with the new amount or leaving in 2 months? My intuition says don't to avoid the possible animosity, but I wonder if they wouldn't mind staying with the increased price once they compare what else is out there. Would offering this cause mistrust/damage our relationship too much? Is it better to essentially kick them out than to give them this option?

Jake Wiley · Answer

I would definitely approach your current tenants first.    There is no need to tell them you will not renew.  I think the reality is that its likely too big of a jump going up 35% so you need to be ready for that.     I also like to give tenants as much runway as I can if there is likely going to be a transition because its not convenient to move and nobody wants to be rushed here.   Like @Greg M. mentioned if you give them 60-90 days, it's not so sudden.   It will give them a chance to digest without having a kneejerk reaction.   A chance to look at the market and come back and they may elect to stay because the options are limited.

You just need to get the property up to market rents.

Joshua Adlam · Answer

Absolutely not it will not create distrust, you are simply giving them a heads up and offering a renewal to them before anyone else gets the chance.

I think they will feel more offended if they weren't even offered a chance at staying. You should definitely send them a renewal offer at the increase rate.

Lastly, I don't think facebook shoudl be your main place for finding tenants. I'd definitely recommend using zillow or zumper.

35% Rent Increase Worth It??

Most Popular Reply