How to price rent increases for tenants paying way under market

Question

I recently inherited a multifamily property which had not been as actively managed as it should have been for a couple years. There's four units in the building ( two 3 bed/2ba, a 2bed/2ba, and a 1bed/1ba basement apt) and the tenants of all of them have been paying decently under the market rate for a while now. I've run the numbers and with the current debt on the property I would be breaking even unless I raise the rent quite aggressively. How should I go about doing that, is it normal to have the rent increase by multiple hundreds of dollars so quickly? I am a first time landlord so I still don't really know how to even price the property, any tips and help would be appreciated

Alecia Loveless · Answer

@Ahsan Shawl in April I bought an 8 unit that the management had been ignoring and hadn’t raised rents since they took over the property 8 years ago to just avoid dealing with it. The owner was in a nursing home and was happy receiving $30,000 per year with no headaches.

The rents for the 1/1 units ranged from $550-675 and the 2/2 was $700. Market rents were $750 per month higher. When I viewed the property in February 4 units had the heat at 78 degrees and 3 of those had the windows open. The temperature was -15 outside.

I have made a unilateral decision to switch all my buildings to the tenants paying for their own heat rather than lowering their heat to the state allowed 68 degrees.

Two months in I raised the rents on all the 1/1s that weren’t on a lease to $800 plus next month they will be paying their own heat. The 2/2 went up to $975.

I only lost one tenant who since then has referred me two new tenants so he has gotten a referral fee and has no hard feelings.

I would recommend ripping off the bandaid if you can afford to and raising rents to market level or close to it as soon as possible. If you can’t afford to have all units vacant at once only raise them one at a time and that way you can also do any necessary renovations when the unit is vacant if they chose to leave.

My rents have gone from $48,000 to $86,000 and I expect by November when we finish our renovations for winter my ARV will be close to $900,000 where my purchase price was $460,000 in April.

Don’t waste time. Raise rents. Increase your cash flow. This is a business. Run it like one or hire a property manager. Anyone can buy properties and lose money. Be the person who buys strong cash flowing properties that move you towards financial independence.

Greg M. · Answer

What do you mean you don't know how to price it, but rents are under market?

Look at listings of what has rented (not just listed for rent, but actually rented), see how long they lasted on the market, see what they offer and their condition. You should be able to figure out what your particular market covets (more bedrooms vs larger open space; backyard vs front yard; etc). From this, you can come up with a fair market price.

Your goal is to get a tenant (not necessarily your current tenant) to this price as fast as possible.

If your current tenants can't afford market price, get rid of them as fast as possible. Don't slowly move up the rent as all you're doing is losing money between now and the day they leave when the rent hits a number they can't afford.

If they can afford the market rent and are good tenants, move them up to 85%-90% of the market rent. It's a better deal than they can get elsewhere and they likely won't leave. If they do, market it a full market rent.

Michael Smythe · Answer

We’ve found the best way to raise rent is:

• Determine market rent
• Share the proof with the tenant
• Tell the tenant, given your rent is $x and market rent is $y, what do you think if a fair increase?
• Often, they may volunteer a higher amount than you were hoping for.
• Those that respond “$0” or something ridiculous, you can request income documentation from them to justify.
• Don’t be afraid to share with them how much your property taxes & Insurance increased and that YOU cannot afford to absorb them.

ALWAYS get an increase or something of value annually or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

Henry T. · Answer

What Greg M. Says., then send the proper notice. If you don't know how, join a local landlord association.

Nathan Gesner · Answer

This is probably asked a dozen times a day, every day. If you use the search bar and ask the question in your title, you will probably find hundreds of discussions.

My suggestion is that you should only raise the rent on an existing tenant if you have evidence they are excellent renters, they can afford the increase, and the increase is no more than 15%.

If the increase is more than 15% or you have reason to believe the Tenant may not be the best, then I recommend you end their lease, clean the unit up, and rent it to a new person at market rate.

John Underwood · Answer

I would raise the rents slow and steady or you could have zero income for a while if everyone bolts at the same time.

Your numbers should have been cash flowing at currents rents or maybe this wasn't such a good investment?

How to price rent increases for tenants paying way under market

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