Advice needed on bringing rent to market value.

General Landlording & Rental Properties
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Advice needed on bringing rent to market value.

Jeff Owens
Salem, VA · Member since 2013 · 26 posts · 31 votes

I apologize for the length of my post, I wanted to provide as much information as possible to hopefully get the best advice possible.

I am currently under contract to pick up a small 20 unit complex of 2 bedroom units. The complex contains 6 units who have tenants who have been there over 10 years, and a handful that have been there 4 or 5 years. All of whom pay on time and are good tenants, so I do not wish to lose them. I do however want to get rents up to market value.

I am in an area that enjoys a low cost of living and the rent roll ranges from 500 to 700 a month on nearly identical units features and square footage wise. Floor plans are different in the 4 buildings in the complex. Historic buildings built in 1908 as part of a college who closed down in the 30s, converted to apartments some time ago, so every building is unique.

I know that I can't close on this and just jump half the complex 200 a month the day I close, I was thinking of doing some meaningful to tenants type improvements adding a few amenities, like for example it's on 3.5 acres of park like land. I was thinking of putting in a picnic area with park grills, and a fire pit, and a covered picnic table area, maybe a few gazebos that overlook the spring on the property, I noticed that some tenants have kids, maybe a little play ground. I also have to do some repairs to the outside of the property that have been neglected in the past, about 100k worth of work. I am hoping that when tenants see a lot of work going on for a while, they will understand when I raise rent by 10 percent a year on the underpriced units until they are in line with market value.

I don't have this problem on my other properties as I always raise rent yearly by amounts so small that it doesn't offend tenants, instead of allowing large gaps to occur like the current owner of the property did. This is my first property so out of line with market value, and I am not sure the most appropriate way to adjust while still retaining good tenants.

Any and all advice is very much appreciated!

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  • Edward Burns
    Rockford, IL · Member since 2013 · 330 posts · 62 votes
    12y

    Making visible improvements and slowly raising the rents is probably the best alternative. For the individual apartments far below the market value, raise at a rate of $10-20 more than the average rate increase in the area. IE. It appears rent has increased about $20/month per year over the last 10 years, so increasing the rent on the low rent apartments by $35/month for the next few years is reasonable.

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  • Jeff Owens
    OP
    Salem, VA · Member since 2013 · 26 posts · 31 votes
    12y

    Thanks Edward, I was leaning towards the same thing, but was hoping for a faster time frame. I guess I just got greedy. Truth be told I stole this property with an all cash close quick offer. It's cap rate is 17 percent as is, in a market where 9 percent is average. 80 year old owner just wants a lump of cash and is liquidating all the properties he owns. I was looking at bringing rent up quickly as gravy on the potatoes. This one gets me to semi retirement, just doing books and answering a few calls. I am 36.

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  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    I would prioritize the deferred maintenance repairs first, and not do any improvement to the below market tenants units just yet.

    I would bump their rent by say $20-30 per quarter which will allow them a little time to adjust but also make the time it takes to get them up faster. If you do it this way you will easily be over half of the way to your desired rent rate before this time next year and in 18 months be all the way there

    I would begin doing any amenities type improvements in spring 2014 when it will kind of break into the middle of the series of rent increases showing them that their money is going to good use and also hopefully allowing you to quickly fill any vacancies that might come up. Though I doubt you have too much trouble most probably know they have a great deal and as long as you give them a little bit of time and stop at a rate just below the market they'll likely continue to stay there.

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  • Jason Munck
    Spokane, WA · Member since 2013 · 57 posts · 7 votes
    12y

    In the book "How I turned $1,000 into $1 Million in Real Estate in my Spare Time", William Nickerson actually went around talking to his individual tenants telling them about his intention to improve the property and raise rents. Even if you don't to all of them you I think there are a couple of potential advantages to this.

    1. Your tenants will probably tell you which improvements are important to them rather than having you guess what would be added value. For all you know they may just want a fresh coat of paint on the inside of their unit.

    2. It would let your tenants know that there is a new owner (which they probably wouldn't know otherwise) and you would have an opportunity to make a good first impression as the owner fixing up the place instead of hoping they notice the improvements on their own.

    3. You have an opportunity to create a win-win relationship with your tenants. By and large, most people understand that a nicer place to live commands a higher rent. In Podcast #26 Chris Clothier talks about having a win-win relationship with tenants and the benefits it brings (lower vacancy rates is one of the benefits). If your tenants get a chance to meet you and understand your plans it may make the idea of rent increases more palatable than just getting a letter in the mail from a faceless owner with rent increases every quarter/year and never knowing when the increases will end.

    4. You would get a better sense of how well the tenants would absorb the increase and provide a better picture of how quickly to raise rents. Nickerson raised his rents all the way to market in one jump (although he let his tenants know well ahead of time).

    Nickerson also points out that he doesn't like similar units to have different rents. Once the tenants talk to each other and realize they aren't paying the same rent it creates animosity. So he would explain to the low-paying tenants that their rent is clearly below market as evidenced by the other units.

    Just some food for thought.

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  • Jeff Owens
    OP
    Salem, VA · Member since 2013 · 26 posts · 31 votes
    12y

    thanks for all the replies so far, it shows my thinking isn't far out of line with reality and also gave me some ideas. To the poster who brought up having tenants out of sync, I had the same idea when I saw the rent roll. All I could think was "Oh yay, Huffington Post will soon be featuring me as a model of inequality, then they will complain I plan to proffit from the investment"

    I much prefer tenant conversations to go more like." how is your rent 20 bucks cheaper than mine" "well I have been here 5+ years" explaining 200 bucks is hard.

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  • Jeff Owens
    OP
    Salem, VA · Member since 2013 · 26 posts · 31 votes
    12y

    I was actually thinking of having a free barbecue event to meet all of the tenants and go over any concerns and explain how I will manage things, etc. I am not sure if that is professional or wise, but I wanted to do some kind of fun event that shows them who runs the place, and hear concerns, other than just sending out letters informing them of change. I am the first in line to make fun of my tenants when talking to other landlords, but at the same time my tenants put food on my table. I try to maintain a balance, and very much try show I appreciate them for what they do for me financially. It's nothing more than a juggling act it seems. Fr

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