How to Raise Rents?

Question

Hey all! Im new to the game. Have had an Airbnb out of our primary residence basement for 2.5 years and bought a duplex in November after taking out a HELOC on our primary to use for the down payment and some renovations.

We also recently closed on a fourplex as a partnership with a friend. Used enirely OPM to buy this one, and borrowed money from a family member who is in commercial real estate to do the renovation. (I have experience raising money as a professional musician so this came somewhat naturally to me).

The duplex is rented well under market rate ($600 on each side. 2-bed apartments), and the fourplex has two rented units on the lower half well under market rate ($475 on one side, $600 on the other also 2-bed apartments).

Market rents in this area for those size units are closer to $1,100 (a little more, actually).

Previous owners owned these spaces for a very long time, so their taxes were low and those rents were manageable for them. These rents do not cover mortgage/insurance/taxes as it stands now. Plus, we're investing heavily in each property with the intention of doing a cash-out refi within two years of owning each one.

OKAY. That's pretty much it. Any advice on how to raise rents?

I was planning to send letters explaining the higher cost in taxes, market rents in the area, and then offer a gradual raise to meet in the middle somewhere. Yeah? No? Appreciate you all!!

Ke Nan Wang · Answer

What's the condition of the unit comparing to the market houses? Are they average, below average and I doubt they are above average.

If it's below average, I would discontinue the lease when it's up and then do a renovation then put it on the market for market rate.

If the condition is similar to the market average but your rent is severely under market rate then I take an average between the current rent and the market rent and send them the following message 2 months before their lease is up (assuming you aren't in a rent control market),

Dear Tenant,

Some nice words and remind them that their lease is up within 2 months, please select the following options about their new lease, also mention that you are doing the best you can to maintain the rent as low as possible but with inflation, insurance and property taxes increasing, you have to raise the rent to keep up with the rising expenses.

1. Renew for a 12 month lease at XXX/month (new rate)

2. Go on to a month to month at XXX/month (new rate x 1.2 or 1.25 depend on how you feel about it)

3. Move out on or before (lease termination date).