Realistic to raise rents from $825 to $1150?

Question

I inherited tenants in March 2024, who’s lease is ending in October 2024. They are paying $825/month. It’s a mediocre but not killer deal for me to not renew lease, rehab and rent to new tenants, as I’ll make only 8% COC. The market rents on other hand are $1150 as is (this per the appraisal). If I rented it for that amount now, that would be great (12% COC). But is it reasonable to expect the tenants to accept that increase? What are the chances they would actually agree to that? And what is the amount of increase that is reasonable in this situation that a tenant would be ready to swallow?

In short, if it is unrealistic they would ever accept $1150, I would like to know beforehand, as I don’t want to be shooting my sled in the foot. Anyone with experience in this?

thanks

Nathan Gesner · Answer

Don't trust the appraiser. Study the market on your own by looking at similar rentals in your area. You should do this at least once a month and always monitor the market's movement.

If the current tenant is really good and you want to keep them, offer them a renewal with an increase 5-10% below market. If they are smart, they will consider the cost of moving and see the benefit in staying. If they leave, rent it at market rate to someone new.

Drew Sygit · Answer

@Levi Perl great point by @Gregory Schwartz.

We'd add one thing to his suggestion though, check out comparable rents on Zillow, Rent-O-Meter and at least one other source. Just be sure to do your best to compare apples-to-apples, not just with beds/baths/sq ft, but also quality of finishes.

Then present this info to the tenant and ask them what they think a fair increase is.

Strategy is to show them they can't find anything else at the rate they are paying.

Of course, at least 25% of the time they will claim they can't afford any increase. Then you give them a "take it or leave it" offer.

One other bit of "home work" for you - how much will it really cost for you to repair the property if they move out, to market standards to get the $1150 in rent? You should also add 1-2 months of lost rents due to repair time and marketing to find a new tenant, and your carrying costs (prop taxes, insurance, utilities, mortgage, etc.) to this amount.How many months will it take you to recoup that amount via the higher rent amount versus whatever increase the current tenants agree to ($1150 - $825?)? Many investors are too short-sighted to do this math and fail to understand that it's often foolish to focus soley on top-of-the-market rent as it can actually be more profitable to accept less than max rent to keep a good, stable tenant.

Gregory Schwartz · Answer

Crazy idea here.... ask the tenants. Let them negotiate their own increase.

How does this work?

"Mr Tenant, Im very excited about the opportunity to be your landlord and provide better service then you've experienced in the past" (side note it helps if you've already demonstrated your increased service) "As you know the renewal time is coming up quickly. Rents will need to increase to keep up with the increase in property tax, insurance, maintenance cost etc. Based on the other rents you've seen, what is a fair rent rate?"

Like I said, its a little bit of an outside the box approach but its better than blindsiding them with a 40% increase!

Good luck!

Andrew B. · Answer

Compare your unit to the other units that are worth $1150. Is your as nice? If not, I recommend you ask for a little less. If they leave, you remodel so it becomes worth $1150. If they stay, you get more rent.

Theresa Harris · Answer

You have no way of knowing. When looking at rents, make sure you are comparing units in similar areas and conditions.  Also check if there are rent caps.  You can let them know well in advance rent would go up to $X or simply ask to have the unit vacant at closing as it will be close to the end of their lease.

Peter W. · Answer

The appraisals are awful, awful, awful at predicting rent price.  Actually, most of the tools online are awful at it.  You need to watch the market yourself and get a real understanding of the market.  Just as an example, a SFH I just bought got the rents appraised at 1900/mo,  bigger pockets suggested 1900, zillow estimates rent at 2400 and rentometer suggests 3000.  Comps of single-family homes suggest we are in the 2500-3200/mo range.  We see duplexes going for 1900/mo in the neighborhood and newer apartments in the 3000/mo range. Do your homework and understand both demand and market prices in your market.You're suggesting an almost 40% increase in rent.  If I got that notice as a tenant, I'd be shopping around.   It's not unrealistic for them to accept 1150 if that is actually market, but it will definitely shock them.  Do both of yourselves a favor and give it a long lead time, that way they can come to terms with the new rent and make adjustments to their budget, and if they are moving out, you both have time to get your ducks in a row (you to try to do a fast turnaround on the rental) and them to find an appropriate new home.  Handymen to help with turnover in my area are booking 4-5 weeks out.

Folks here have a wide variety of strategies when it comes to raising rent.  Some always aggressively raise to market rents, others are less aggressive, because they believe it saves them on turnover costs.  Everyone suggests raising the rent.  I tend to be in the later camp as a personality trait and not as someone with hard data that knows which one is better.  The answer depends on what the actual rental market and market rates are right now (how long does it take others to get their place rented) and your turnover and vacancy costs are.   If you are good at transitioning tenants and doing a quick turnover and it'll be easy to get another tenant, then you should be more aggressive with the rent raising.

Colleen F. · Answer

@Levi Perl do the research, you can set up an auto alert for apartments for rent in your area to keep current and see actual units at that price. Give 60 days notice and set your increase based on comparable properties and the convenience on not putting out the money for the rehab now. The most increase I was successful with was $150 but that was  10 % and they knew they had a good deal. You could even go month to month if they can't afford it they will hopefully move on.

Rick Albert · Answer

I don't always trust appraisals when it comes to value. Not because they do a bad job, but their focus is to be as objective as possible in a subjective industry. I would look hard at the comps to see what makes sense.

From there, I look at the cost of vacancy. If it costs you $5K in turnover (renovate, vacancy, etc.) and divide by the difference, see if it makes sense to you. Maybe there is a compromise of somewhere in between. Vacancy sucks.

It will also come down to what's available. Some tenants might be for it if they don't have a choice. Others may push back and give you a bad rap (tenants talk).

The last thing is look into state and local laws to see if you can even raise rent by that much.

Adam Bartomeo · Answer

Yes, you can raise rents to market rent and people will stay. Can they afford it? That is a whole other story.

Realistic to raise rents from $825 to $1150?

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