How Soon to Raise Rents?

Question

I closed on a terribly mismanaged 8 unit mid April. Rents are at a minimum of $450-$750 below market value. 4 of the units are MTM, 1 is currently vacant that I have a tenant lined up for at full market value as soon as the unit is ready, and another unit will be vacant at the end of the month which I will then get full market rent for.

How soon should I send out letters raising the rents? Would you raise them the full amount to market value which in some cases will raise the amount by about 40%? Or raise them by a little more than half this year and then the rest next year?

I also plan on transitioning the building to the tenants paying for their own heat this summer which will be an added cost along with the rent increase.

Most of the tenants are on a limited income and work at a local grocery store where the pay is not terribly high. That being said my new rent cost of $900 per month plus heat will still be about $400 less than any other apartment nearby or in surrounding areas.

Thanks!

Nathan Gesner · Answer

Why are you throwing so much money away?If rents are an average of $500 below market, you are losing $4,000 a month or $48,000 a year. Why would you purchase a property like that and then keep rents low or keep the same tenants?The existing tenants are so far below market rates that I would not bother trying to keep them. There is a very good chance they are low-quality renters. They probably can't afford such a large increase. There is a good chance they will feel bitter about the increase and may cause trouble. Even if they accept the increase, there's a good chance they may not be able to affor it and they'll eventually stop paying and cost you even more money.The best option is to move them out, spruce up the units, raise rents to market rate, then place your own tenants that have been screened to your standards and can afford the rent. If you can afford it, the best option is to raise all the rents at once so you get similar quality Tenants, the old tenants aren't complaining to the new ones, etc.

Ray Hage · Answer

"How soon" is really up to you. I would give them a few months and let them know in advance. Let's say you're going to raise the rent in August. I would probably let them know now so that can at least be mentally and logistically prepared vs just a month before hand. I feel advanced notice just creates less bad blood and less chance for the tenants to be difficult when they know well in advance. You don't want someone absolutely trashing the place on their way out or have to go through an eviction process if you can avoid it.

Chris Schwagerl · Answer

Of course you want to have a heart and not be cruel, and that's why you're asking this question.You'll figure out the answer in your heart. In terms of valuation, commercial properties are valued based on NOI. If your rents are $500/month below market rate, you're leaving $$ on the table.$500/month x 12 months = $6,000 x 8 units = $48,000. If cap rates are at 5%, you are de-valuing your property by $960,000.

Eliott Elias · Answer

Does the condition justify market rents? Look at your state laws and see how much you are allowed to increase rent in a given year. If they are on month-to-month leases you can increase immediately. You are likely to experience vacancy if you increase 40%.

Joseph Guzzardi Jr · Answer

@Alecia Loveless There are a few factors here that you need to take into consideration pending location of this building. Need to fully understand parameters of the current lease in place. Need to understand local rent laws in terms of how much you can increase rent, how much notice is required etc..If all is good on those fronts, be prepared for tenants to ask to improve items within their respective apartment at a minimum if they do decide to stay.

Melanie Thomas · Answer

Before raising the rent, it's important to review your lease agreements and local landlord-tenant laws to ensure that you are within your rights to raise the rent and to determine any limitations on how much you can raise the rent. It's also important to consider the impact that a significant rent increase could have on your tenants, especially if they are on a limited income. A sudden and large rent increase may cause financial hardship for your tenants and may increase the risk of tenant turnover. One approach may be to raise rents gradually over time, rather than all at once, to minimize the impact on your tenants. For example, you may consider raising rents by a smaller amount this year and then gradually increasing them over the next few years until you reach market value. Another approach may be to offer your tenants the option of signing a longer-term lease in exchange for a smaller rent increase. This can provide your tenants with more stability and certainty, while also helping you to increase your rental income over time. Ultimately, the decision of how much to raise the rent and when to do so will depend on a variety of factors, including the local rental market, the financial needs of the property, and the needs of your tenants. It may be helpful to consult with a local real estate agent or property manager who can provide guidance and insight into local market trends and rental rates. Good luck & happy investing!

Jim K. · Answer

All I can say is, get ready to spend a lot of money.