Should I raise the rent?

Question

Thanks for your thoughts in advance..I'm deciding whether or not to raise the rent on one of my single family long term rentals, and if so how to break the bad news in this difficult time of inflation? I'm a fairly new investor, the rental market is white hot where I am  in Southwest Colorado, with very little inventory. Comps show that I could raise it $500/mo or more. I can't believe how high rent is getting, but my place is out in the country, 1.3 acres, with killer mountain views and newly renovated. The benefits of this renter are that he is single, living in my 4 bedroom house, disabled veteran so his income is secure, he takes good care of the house and keeps bugging me to buy it. I'm not in this to gouge people, but it is my business and I'm personally $1000-$1500/mo short of paying all my bills and being" financially free"

Bruce Woodruff · Answer

Being a disabled veteran means to me, taking it a little easier on him, but still you have a business to run here. In this case, I'd sit down and go over numbers with him over a beer, show him you are upside down, and he should understand.

Theresa Harris · Answer

Are there any limits on how much you can increase the rent?  If not, do what you are okay with knowing that a $500 increase is going to result on them moving.  Another option is you can sell it to home off market for market value and use the money to buy a new place.  You'd have to pay some taxes, but buy a place that is vacant and charge market rent.  The best is increasing the rent every year as they get used to the increases.

Nathan Gesner · Answer

It's nice that you care for a veteran, but what about your wife and kids? You're currently $500 below market which is $6,000 a year you're giving this stranger to supplement his lifestyle instead of supporting your family.

"I'm sorry, sweety. I know you dream of being a dancer some day, but Daddy can't afford the fees because I'm supplementing a Gold's Gym membership for a stranger. Maybe next year."

LOL! Sorry to be an a$$, but it's the truth. If you want to get ahead in life and build a future for your family, you need to stop supplementing strangers. If the property is worth $2,600 a month, he'll recognize that and stay. If not, he'll move on and someone else will pay it.

I'm a disabled Vet, and I like Bruce, but I disagree with his advice to sit down over a beer and sell it to this guy. Did anyone crack a beer with you when gas prices doubled in one year? No! The market shifted, we all know it's not the fault of our local Exxon, so we do what we can to move forward. This guy needs your honesty, not some patronizing gesture.

Jonathan R McLaughlin · Answer

@Terry Ouimet if he keeps bugging you to buy it I don’t think he’s hurting for cash…

I wouldn’t give an unintentional discount. Know market, make sure he knows market, name a price with any discount u want to offer due to his service etc.

I’d also put a time limit on it: “ market is x, I’m charging you Y for the next year because you have been a good tenant etc, will adjust as necessary”

Bruce Woodruff · Answer

I had a soft moment for once......give me a break.... :-)

Julien Jeannot · Answer

Terry,

My philosophy is to take rent increase when you can, but to balance it with the following items.

- Year over year expense increase: insurance, tax, and maintenance.

- Cost of a turn in case the tenant decides to leave and when the breakeven will be.

- Your next acquisition, keep in mind the ratios bank like to see. The higher The income to deb service ratio, the better.

As far as breaking the news. Always keep in mind local laws, keep it professional and you can always soften the blow by showing comps, pointing to inflating expenses to keep the place well kept. Another approach I've used successfully is to replace or improve something at the property to keep good relations and keep the tenant happy: new appliances, floor, fence, ect...

Terry Ouimet · Answer

I like your style @nathang, it’s not personal it’s business. He’s actually up for a contract renewal so it’s a good time to address this, The property is deserving of a rate increase and there’s nothing else remotely close on the market, thanks !

Terry Ouimet · Answer

Great advice @jonathanrmclaughlin, I believe you’re right he does have some cash and a few nice muscle cars he must not have any credit because he did bring up renting to own I don’t have an interest in selling it right now it’s cash flowing $2100 per month for me right now, barring any repairs etc , i’ll revisit my market numbers as you said thank you sir

Terry Ouimet · Answer

thanks Theresa!  I'm charging $2150/mo ,  the comps show smaller or "lessor" properties at $2200- $2750/mo...youre point on selling...I do have to make a decision by late 2024 to sell and avoid capital gains,  or keep it for the long term and then do a 1031 when I do sell, its debt free, paid off.  Good point I should have been incrementally increasing rent the last couple years. The other option is do a rent to own contract with him but it makes no sense to guarantee him a selling price when  its appreciating double digits every year and I know he loves renting there anyway.

Terry Ouimet · Answer

thank you Bruce, I agree. Although I think he could still take me LOL..hes a ski instructor, works out at Golds Gym and is very active..regardless, hes I like your idea, plus hes using my pricy washer and dryer I just remembered!

Should I raise the rent?

Most Popular Reply