How to raise rents?

Question

I'll be hopefully getting a closer look at a fully rented 3 unit I'm considering purchasing. The current rents are $600, which is about $100-$150 below market. The tenants are month to month right now. My question is, what's the best way to raise rents? Gradually? Immediate just below market? Full market?

What about gettingt 1 year leases signed (provided these are good tenants I'd want to keep)

Ned Carey · Answer

I don't know the answer but I will give you some e things to think about

• It is a hassle & expense to move. If a tenant can afford it they are not likely to move over a small increase in rent.
• They may know they are paying under market rent and may be expecting you to raise the rents just because you are the new owner.
• Consider what your tenants can afford. Charging more than they can afford cannot work long run.
• One of the biggest costs to landlords is turnover. If these are long term tenants it may be worth less rent to keep them.
• I would have a conversation with them before taking any action.

Good luck - Ned

Jeff Rabinowitz · Answer

It may be a bit more difficult to do this with a multi-family building but have you thought about asking them what they can afford?  I have pretty good success with this for my single family homes and my long term tenants.  When I feel it is time for a rent increase I call them and tell them the number I'm thinking about and ask if they could handle that right now.  I usually pick a number higher than what I am actually looking for and don't usually do this unless there hasn't been a rent increase for at least a year and a half.  The responses range from "yes, that would be fine", to "we could handle that in a couple months", to "an $X increase would be a lot easier".  It is rare that the figure they offer is not at least what I was looking for.  If I accept their lower suggestion or delay the increase they often thank me for it.  I get my rent increase and don't alienate my long term tenants.

Darren Sager · Answer

Before we consider purchasing any buy and hold we always go to the town that we're considering the purchase in and find out if they have rent control laws.  If they do we see how they might effect our ability to run our business.   Before any other step you do call the town tomorrow and find out.  Chances are they might be covered by it however if you're an owner occupied 3 family you aren't effected by them. When you move out you would be.  Call the town tomorrow @Arthur Banks !

Sam Leon · Answer

I would have a talk with them individually before making a decision.

You don't have to approach them to talk about rent increase.  Approach them to ask about what they like and don't like about where they are renting.  Make no promises but let them know you are interested in keeping the place up and and may consider improvements.  You walk about knowing what you might need fixing and how likely they are going to stay or leave.

You could implement a rent increase but offer an incentive at a reduced rate if they sign a one year lease.

Also the tenants will talk to each other, especially during an ownership change.  I would be very careful if you are not raising the same for everyone - i.e. raising a lot for the ones you don't want to keep and keep same rent for those you want to keep.

Arthur Banks · Answer

Elizabeth  Colegrove  So let me get this straight, you collect first month, sec. dep and 2 more months of rent as buyout fee?

Is that an optional offer? Is your sec. dep the same amount as rent amount?

Arthur Banks · Answer

Elizabeth  Colegrove How/when do you collect the fee?

Arthur Banks · Answer

@Ned Carey Good advice. Thanks

Elizabeth  Colegrove How has that buyout clause worked out for you?

@Jon K. I thought about waiting until warmer months, but thought against it because I imagined no one wants to move during the cold winter months, so they are more like to stay. I know I don't want to move during winter. Anyone have experience with this dilemma?

@Darren Sager I didn't even know to look into that. Thanks.

@Sam Leon I like the idea of feeling them out through conversation and asking what they like and don't. But not giving the idea that everything they don't like will be addressed. Good idea about the incentive.

Arthur Banks · Answer

Thanks all for the comments and suggestions. I got a look last night and the property was not as advertised or listed. It was not something I would live in myself and therefore not anything I would want in my portfolio.  But I will take all the suggestions and advice with me as I continue to seek my first property as I re-enter the RE world.

Account Closed · Answer

I second what Sam said. Keeping a clear communication channel between you and the tenants is always key.

Elizabeth Colegrove · Answer

@Arthur Banks

I only collect the buy out WHEN they ask to break their lease. I do NOT use their security deposit. That is strictly for how they left the room. The buyout is something different.

How to raise rents?

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