What would be an appropriate rate for increasing monthly rent on my fourplex?

Question

I have 3 units, they are on the older side but very well kept by the current tenants that I inherited. All units are in the $650-$675 range and average market rent is at $850. I would love to keep these tenants, but I also want to eventually renovate the units and bring them up to market rent. A renovated unit goes for about $1000.

I was thinking an 8%-10% increase on a 6 month lease. Any thoughts on this would be greatly appreciated.

Bill B. · Answer

Why are you subsidizing their housing? Are they relatives of yours? You sound like a prime candidate for a property manager.

1) what’s your plan when they introduce a rent cap of 5% per year and you’re 20-30% under market? Lose thousands per year for the rest of your life?

2) raise their rent to market and then just write them a check every Christmas for $2,000 so you understand what it’s costing you.

3) you are literally paying to be a PM. You would collect more net rent with one that’s you are collecting by doing all the work yourself.

4) IF your research is correct, when you raise the rent to “market rates” they’ll look around and see everything else is just as expensive. Why would they take time off from work, safe up an extra security deposit and pay to move to pay the same rent?

5) if the renovations to get $1,000/mo are less than $2,000 do them yesterday, if they’re less than $4,000 do them today. Again, assuming your numbers are accurate. Maybe ask a couple local PM’s how much they would charge in rent, how much it would cost and how long it would take to find tenants.

I understand you maybe be in a financial situation where $500/mo doesn’t mean anything, but collet the rent and then just donate it to your favorite charity. Anything less than market is just a gift.

Nathan Gesner · Answer

This is one of the most common mistakes I see with inexperienced investors.

You are losing a minimum of $7,000 a year by subsidizing your Tenant's rent. This means you have less money available to maintain the property, which is how Landlords eventually get tired and defer maintenance and start the downward spiral towards being a slumlord.

If you spruce up the units and rent them for $1,000 each, you will increase your income a minimum of $15,000 this year. By staying at market rates over the next 10 years, you will earn over $200,000 more than your current trajectory!!! You will have higher-quality renters that can afford to pay market rent, they will take better care of the property, and your property will be more attractive to a buyer if you ever choose to sell.

Bob Stevens · Answer

That is very low, assuming 2 brs,  I get 875- 950 for 2 brs there. Heck I just got 840 for a 2 br in East Cleveland,  Who is your PM ? They should be taking care of this not you

Nathan Gesner · Answer

So you're $350 below market right now and you'll still be $200 below market after paying $7,000 (or more) for a new heating system? You're losing a minimum of $1,600 a month. In 4-5 months you could pay for that new boiler/furnace just by sticking to market rate.

Alecia Loveless · Answer

@Nicholas Sorace In April I bought an 8 unit. Rents had been between $550-650 for 5 years with no increases and market rents are $1150 including heat. Due to tenant abuse and rising costs I am getting out of the market of providing heat to my tenants.

I sent out a notice to the existing tenants that in 3 months their new rent would be $800 per month and that in the fall there would be a new heating system they would be responsible for paying for their own individual account on.

I have one tenant who complains constantly about the increase but says she’s never moving. I have one tenant who passive aggressively mentioned the rent increase once. I had one bad tenant move but now he’s referred me two new great tenants.

If I were you I’d just raise rents to the current market rents for the existing condition of the units and then when there is a turnover renovate and get the $1000 or higher rent at the time.

Michael Smythe · Answer

@Nicholas Sorace

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.

Eliott Elias · Answer

Expect the worst case scenario, and see if you are ok with that. If you are going to increase rents, you might as well put work into the property and increase to top market. That is a good idea if you are looking to sell in the near future as well.

Michele Fischer · Answer

If you are indifferent to them leaving you could increase to market.

Normally what we do is always increase to the midpoint between current and market.  That keeps us making progress toward market but also tends to keep them as tenants since they can't find better shopping around.

So I would increase $95, about 15%.  I think it is important to not leave rent flat too long, but it is ultimately up to you how you want to operate your properties.

What would be an appropriate rate for increasing monthly rent on my fourplex?

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