Raising Rent on Newly Acquired Property

[Larry Nielsen]

I own rental property but I have had them for a while. I am now looking at a property that is tenant occupied going to a month-to-month in November. Its a long term tenant who has not expressed interest in leaving. The rent is currently about $500 less per month than what my research tells me it could be for this property. I know this is a business but advice on purchasing a property and wanting to raise the rent up to fair market from being so much lower? I appreciate any feedback from investors/landlords who have actually experienced this about how they handled it. Thanks in advance.

[Julia Lyrberg]

Raising rent on a long-term tenant can be a tricky situation, especially if they’re reliable and you’d like to keep them. One approach is to gradually increase the rent over time to bring it closer to market value, rather than going for a full $500 jump all at once.

[Larry Nielsen]

Thanks Julia. My train of thought too just a new situation for me.

[Nathan Gesner]

Quote from @Larry Nielsen:

It's actually quite simple. You buy the property, you give the tenant notice of a pending increase, they pack up and leave, then you spruce it up and rent it at market rate so it's a profitable investment.

When egg prices double, do you think the local grocer cries in his coffee every morning about how inflation is impacting his customers? No. It's not his fault the market drove prices up. He's operating  business, taking the risk, providing a service to his community.

Your tenant should be thankful that he saved so much money over the years, but he's more likely to feel entitled and that his rent should never increase. But that's not your problem. 

If the tenant wants to stay, verify he can afford it. Offer to give him a slight discount if he stays, certainly no more than 10% below market. He can stay and pay, or he can go and pay someone else.

[Jonathan Greene]

Listen to an old episode of the BP main podcast with Dion McNeely. It is the best rent raising strategy tactic I have ever heard and it always works (if you like the tenant). If you don't look it up, the general tenets are this:

1. Present the existing tenant a PDF with all of the rental comps and Rentometer printout showing what the market rent is.

2. Ask the tenant to come up with a reasonable offer based on the data so you can work together to keep them there.

Almost all tenants come in $100-$150 under the market rate.

It's a win-win. No moving, a little under market, but same good tenant.

[Larry Nielsen]

Also very good point, Nathan. Thank you.

Quote from @Nathan Gesner:

Quote from @Larry Nielsen:

It's actually quite simple. You buy the property, you give the tenant notice of a pending increase, they pack up and leave, then you spruce it up and rent it at market rate so it's a profitable investment.

When egg prices double, do you think the local grocer cries in his coffee every morning about how inflation is impacting his customers? No. It's not his fault the market drove prices up. He's operating  business, taking the risk, providing a service to his community.

Your tenant should be thankful that he saved so much money over the years, but he's more likely to feel entitled and that his rent should never increase. But that's not your problem. 

If the tenant wants to stay, verify he can afford it. Offer to give him a slight discount if he stays, certainly no more than 10% below market. He can stay and pay, or he can go and pay someone else.

[Larry Nielsen]

Thank you Jonathan. Also good points and this sounds like a good strategy to approach it. The tenant is going from annual to month to month as of November 1st possibly anticipating it anyway.

Quote from @Jonathan Greene:

Listen to an old episode of the BP main podcast with Dion McNeely. It is the best rent raising strategy tactic I have ever heard and it always works (if you like the tenant). If you don't look it up, the general tenets are this:

1. Present the existing tenant a PDF with all of the rental comps and Rentometer printout showing what the market rent is.

2. Ask the tenant to come up with a reasonable offer based on the data so you can work together to keep them there.

Almost all tenants come in $100-$150 under the market rate.

It's a win-win. No moving, a little under market, but same good tenant.

[Chris Grenzig]

@Larry Nielsen I like Jonathan's suggestion, but I think an important decision for you is what is your goal. If this is a longer term hold and you don't need the extra $500 per month and you'd be fine with a $200 per month increase, go for that. You can always raise it again in 12 months on their next lease. 

Also, always be careful with very long-term residents that are far below market rent, it's very possible there are issues they live with and don't say anything about because they've been there so long and they know their rent is cheap. We've had it happen before, nothing major, but just some extra money we weren't originally planning on spending to turn a unit. 

[Greg Kasmer]

@Larry Nielsen - I like the strategy Jonathan Greene outlined to provide good, updated information to tenants on the market rents. That gives great context to the tenant. I bought a quad this year and had my property management company do a similar thing, but the only wrinkle was 2 tenants moved out and a 3rd was about to, so instead we negotiated "two stepping" the rent increase with the third tenant. A $200 increase now and then another $150 increase in 6 months. I didn't want to have three vacant units at once, so I tried that approach with the 3rd tenant. I'm in the processing of renovating the two units from the people that did move out. Good Luk!

[Larry Nielsen]

Chris, great points as well and something to think about.

Quote from @Chris Grenzig:

@Larry Nielsen I like Jonathan's suggestion, but I think an important decision for you is what is your goal. If this is a longer term hold and you don't need the extra $500 per month and you'd be fine with a $200 per month increase, go for that. You can always raise it again in 12 months on their next lease. 

Also, always be careful with very long-term residents that are far below market rent, it's very possible there are issues they live with and don't say anything about because they've been there so long and they know their rent is cheap. We've had it happen before, nothing major, but just some extra money we weren't originally planning on spending to turn a unit. 

[Larry Nielsen]

Thanks Greg. I appreciate your input as well here. Something to think about.

Quote from @Greg Kasmer:

@Larry Nielsen - I like the strategy Jonathan Greene outlined to provide good, updated information to tenants on the market rents. That gives great context to the tenant. I bought a quad this year and had my property management company do a similar thing, but the only wrinkle was 2 tenants moved out and a 3rd was about to, so instead we negotiated "two stepping" the rent increase with the third tenant. A $200 increase now and then another $150 increase in 6 months. I didn't want to have three vacant units at once, so I tried that approach with the 3rd tenant. I'm in the processing of renovating the two units from the people that did move out. Good Luk!

[Scott Allen]

@Larry Nielsen Sounds like a very long term tenant if their rent is that low and they've been reaping the benefits of it being low for at least the past 3 years. There is a chance their unit is also pretty dated compared to the others or others in the same neighborhood. It's beneficial to you that their lease is about to come to an end. You can make a new lease with that tenant proposing a rent raise anywhere from $300-500 but you have to be able to justify it (maybe the property doesn't have central AC, maybe you're planning to do some other type of updating but that can be hard when they're physically living there still if its a bathroom or kitchen) and I would also make it so that that rent increase would go up after 60 days of them signing and agreeing to that new lease. 

Depending on the tenant and what their financial situation is, you might also be better off giving them a 60 day notice and just telling them that you're planning to move into the property and do some updating. 30 days is usually too short for someone to have to move on, 60 days is plenty of notice for them to be able to pack and find another place. If you want to propose 30 days for them to leave, offer a cash incentive so that it makes them feel like it's worth leaving sooner. Do it all in writing with notices and make sure to document it with photos or have a manager handle it. 

[Drew Sygit]

@Larry Nielsen 

We’ve found a great way to raise rent is:

• Determine market rent
• Share the proof with the tenant (they can see it on Zillow anyways)
• 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 when rents are increasing or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

@Jonathan Greene we've been promoting this tactic for over 15 years:)

[Jonathan Greene]

Quote from @Drew Sygit:

@Larry Nielsen 

We’ve found a great way to raise rent is:

• Determine market rent
• Share the proof with the tenant (they can see it on Zillow anyways)
• 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 when rents are increasing or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

@Jonathan Greene we've been promoting this tactic for over 15 years:)

I was doing it 40 years ago for my dad when there was no internet so I get it.

[Larry Nielsen]

Thank you Drew. Seems like a really sound practice. I like it.

Quote from @Drew Sygit:

@Larry Nielsen 

We’ve found a great way to raise rent is:

• Determine market rent
• Share the proof with the tenant (they can see it on Zillow anyways)
• 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 when rents are increasing or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

@Jonathan Greene we've been promoting this tactic for over 15 years:)

[Larry Nielsen]

Thank you Scott. I appreciate this feedback. It makes sense as well and seems non-controversial or at least as much as raising rent can be.

Quote from @Scott Allen:

@Larry Nielsen Sounds like a very long term tenant if their rent is that low and they've been reaping the benefits of it being low for at least the past 3 years. There is a chance their unit is also pretty dated compared to the others or others in the same neighborhood. It's beneficial to you that their lease is about to come to an end. You can make a new lease with that tenant proposing a rent raise anywhere from $300-500 but you have to be able to justify it (maybe the property doesn't have central AC, maybe you're planning to do some other type of updating but that can be hard when they're physically living there still if its a bathroom or kitchen) and I would also make it so that that rent increase would go up after 60 days of them signing and agreeing to that new lease. 

Depending on the tenant and what their financial situation is, you might also be better off giving them a 60 day notice and just telling them that you're planning to move into the property and do some updating. 30 days is usually too short for someone to have to move on, 60 days is plenty of notice for them to be able to pack and find another place. If you want to propose 30 days for them to leave, offer a cash incentive so that it makes them feel like it's worth leaving sooner. Do it all in writing with notices and make sure to document it with photos or have a manager handle it. 

[John Morgan]

@Larry Nielsen

I’ve bought 17 properties with inherited tenants. They all wanted to stay but couldn’t afford market rent. I told them they could stay forever, but I needed to bring rent up. And I always offer to fix or update things for them as soon as I buy them. I slowly raise rent over the next 3 years. Maybe raise rent $100-$150/month right away. Then $100 increase over the next few years to ease them up. Most of my tenants are paycheck to paycheck so I slowly bring the price up. They all know what market rent is and they’re getting a good deal. I rarely ever have turnovers and try to keep everyone for many years. I’d rather keep a good tenant $200 under market rent vs a bad one at market rent.

[Adam Bartomeo]

When we buy these we know upfront what our plan is. It is typically, raise the rent close to market rent, maybe $150 less, and if we turn the tenant over then we rehab the property and get full market rent. It's all a numbers game and knowing if the numbers make sense with the turnover, rehab, and higher rents.

[Alecia Loveless]

@Larry Nielsen There’s some good ideas in the posts.

Personally I just raise the rent to close to market value. I just bought a 6 unit building where rents were under market value by $350-$650 which for one unit was almost 45% under market rent.

I have started raising rents to market rent one unit at a time to avoid a total tenant turnover all at once.

The first tenant I raised $650 and they contacted me to find out why they had been singled out and I had to explain that the increases were going to be across the board. For now this tenant has stayed.

The second was raised by $450 and has opted to leave. This tenant informed me they had found a new place but that they had to stay through November which was within the period prior to the increase. (I gave about 45 days notice).

I will renovate this unit come December and probably schedule the next increase for February. I’d like to go faster but my team is busy with other projects at different locations.

[Larry Nielsen]

Thank you for this perspective Alecia. Makes sense.

[Melanie Thomas]

I’d suggest giving notice of a rent increase that’s just slightly below market value to show appreciation for their long-term tenancy. Ultimately, it comes down to the numbers—if they’re not willing to pay, you can always find new tenants who will. Good luck & happy investing!