Best Methods to raise rent?

Question

I just acquired my first property and will be needing to change the rent. The property is currently occupied for $695 a month, but as a 1,280 sq ft 3 bedroom 1 bath unit, all the comps in the area are at $950 for the lowest. I am looking to raise the rent to $900, I did hear on the Biggerpockets Daily podcast episode 509 method that sounded like a nice way to go about the process without disrupting the life of the tenant too much. The article by Mindy Jensen said to offer 3 options with different perks to them and letting the tenant pick to allow them to feel like the raise is much more mutual.

As of now this is the method I plan to go through with but I was wondering if anyone else had any methods they prefer or recommendations on how to go about the process?

Thanks!

https://open.spotify.com/episo...

Nathan Gesner · Answer

I disagree.If a tenant is more than 15% below market, there's a good chance they won't be able to afford the increase to market level or they'll resent you bumping it so high. "...all the comps in the area are at $950 for the lowest."You're already willing to give away the farm. If your property is worth $1,100 a month, why would you offer it to the renter for $900? You're going to pay a stranger $2,400 a year to avoid hurting his feelings? Does your renter get a 10% discount at the gas station because market prices would be too much? Does he buy his hamburger cheaper than you? I recommend you terminate the existing renter, spruce up the rental, and get a renter that's willing to pay you what it's worth. You don't need to be an a$$ in life, but you also don't need to supplement the living expenses of others. Run your business like a business. Give your charity to actual charities and help people truly in need.

Greg R. · Answer

I'm personally a fan of a more subtle increase. I'd like to give the tenants at least 3 months notice to finds a new place (assuming they are month-to-month). I agree with Benjamin about a gradual increase as well, but you need to figure out how long you're willing to drag this out. I'd personally tell the tenants that market rents are at a minimum of $950, but as high as "x". Establish where rents eventually need to be, so for instance $1,100. Work out a plan where you'll renew the lease at $900 a month for year #1, and then rents would be increased to $1,100 after a year. If they agree, figure out what the laws are in your state and give them the notice that you're required to. If they don't agree try to figure out a reasonable time for them to vacate the property. If they say they need a 3-4 months to find a new place, draw up a new agreement which states they will vacate the property on "x" date.

Benjamin Aaker · Answer

Hi Nathan,You'll need to check the lease first to see if the tenant is month to month. If not, you'll have a hard time increasing the rent until the initial lease term expires. If the tenant is a good one, then your goal should be to gradually raise the rent and not push them out. You can talk to the tenant about how quickly you plan to raise rents.

Tom Fidrych · Answer

A true comp is comparing your place to units of similar size and condition. A place in rough shape should rent lower than a place that is highly polished. It's a cost benefit for you. Should you spent $20,000 to get an extra $300/month? Each situation is unique.Keep in mind that localities are increasingly imposing annual rent percentage increase caps. In Oregon, it's 3% per year plus a specific rate of inflation. Also, you must provide 90 days notice. Other localities are more restrictive so do your homework.

Melanie Thomas · Answer

I'm with Nathan G. I would not worry about hurt feelings. I would notify the tenant of the increase, they can choose to vacate if they are not willing to pay it. Get what you and your property deserves. I spent the first part of my career trying to be the "nice" guy and it always blew up in my face. Good luck and happy investing!

Nathan Holt · Answer

That makes a lot of sense. The reason I was looking at staying below market with the rent was because it needs some major renovations. The $1,100 was a target to reach after all the minimal renovation are complete, not how I view the current value of the property. Maybe my question should be should I charge a lower rate than the comps since it is in worse shape than them or should I just look at the bedroom/bathroom/square footage and rent according to that level of value rather than the quality of the space?I would consider getting a new tenant in there more seriously, however the current tenant has a great track record of paying rent in full and on time every month and I don’t make a whole lot of money so the stability is attractive to me personally while I get the other side ready. (Maybe that’s a mistake too? any advice on that would be much appreciated) Renting for 900 a month would also keep it at just under 33% of his monthly income, so he should be able to afford it. Thanks for the advice and consideration!