Rent Increase Etiquette?

[Brian Jasinski]

Hope I am posting this in the right forum.....

I purchased a house with an existing tenant.  They had no lease in place, but have been paying on time.  It has been 6 months or so, and I want to get them on a lease, and adjust the rent for market conditions.

They currently pay $1,500/month, market for this small house is $2,200 or more.  $2,500 for an updated place / fresh paint & finishes.

The house is not updated, and could use paint, etc. so I am reluctant to adjust too high too quickly.  I cannot really get in there to freshen up the place while it is occupied. 

Is there an acceptable max percentage to increase rent?  I feel like telling them we are going to $1,800, and note in the lease that the rent it will increase $100 each year after that?

How much notice do you provide when increasing the rent?  Is two months notice enough?

Any feedback will be appreciated - Thank you

[Kevin Sobilo]

@Brian Jasinski, a typical tenant budgets to what they can afford. They live paycheck to paycheck or close to that. So, its difficult to handle sudden changes in their expenses.

That is why for normal yearly increase I try to stay in the 1-3% range with a max of about 5%. Most people will see their wages increase somewhere in this range each year on average. So, this kind of change is manageable for most people.

You are not talking about a normal yearly increase. So, I can understand exceeding the 5% range but $1800 is 20% which for an average tenant could destabilize them or cause them to need to move.

Also, how do you estimate market rent? Most people look at asking prices not rented prices. They also don't factor in how long properties are sitting vacant at that price and also don't factor in how long tenants stay at that price. Vacancy/turnover is EXPENSIVE!

So, keep in mind you might make more money charging $2000 than you do charging $2200.

That said, I would probably discuss the situation with them and let them know what market rents are at and that you don't want to raise it all at once. I would probably go in around $150/year for 3 cycles. So, in 2 years (the beginning of the 3rd lease) you would be up to $1950 and sneaking up on market rent which will likely be a little higher by then.

[Kyle Spearin]

@Brian Jasinski I would pull comps and show them what market rents are as a talking point. Given that it's almost a 50% increase from the existing rent price, you might want to set a timeline of 2 or 3 months before it taking effect so they can find alternative housing if they plan on vacating instead of staying at that price point.

Another option could be to ask for the rent increase, but offer something in return. For example, I upper the rent on a tenant and offered storage space so they saw added value for the increase.

[Warren Lizo]

@Brian Jasinski

Sit down with them and have a conversation. Explain it is more expensive than you thought to own the house (real estate tax reassessment, etc) and you want to escrow for making future improvements. Immediately, have them sign a month-to-month lease to formalize your relationship and set basic terms. Otherwise, you have nothing to rely on in the worst case of going to court. I agree with @Kyle Spearin - show them other rental comps (zillow) and offer them a step up in rent schedule, increasing every month. You want them to stay because they are good tenants. You can also show them a $ amount that reflects the financial hit to you for the goodwill rent concession to demonstrate your benevolence. Also, you would understand if they cannot afford the step up and you ask them to give you 60 day's notice to vacate. However, you will not delay increasing the rent. Be fair and firm.

Before you sign a long-term lease, _absolutely_ run a credit check on them. Aside from possibly replacing items that upgrade your property value for 3+ years (appliances, countertops, etc) I would not offer any kind of upgrade. This is not a negotiation. It is your property.

[Brian Jasinski]

Thank you for the thoughtful responses.....

I will show them the comps, and start with a $150 bump, which is still very under market.

Will go to a lease, and note the projected annual increase of $75-100 at next lease renewal period, to get them in line over time.  They have been good tenants, and this should reduce any shock of a large single increase.....