Increasing Rent

[Matt Heath]

Hello Everyone,

I currently own a fourplex and am living in one of the units. The average market rent for a unit is $600. My units are being rented out for $525, $525, and $510 respectively. The tenants have been residing in the apartment for four years and are excellent tenants. The tenant that pays $510 is an older lady and will complain if rent is increased. She even mentioned to me not to increase the rent when I first purchased the property. They have not had the rent increased in four years. I just purchased the property on 12/12/14 and I am not sure what letter to send to increase the rents or by how much and when. The market rate is only taking into consideration the 2 bedrooms. Each unit has 2 bed rooms, one bath, a washer, dryer, and dishwasher with a detached garage. I need to increase the rents, but do not want to scare the tennants out.

Does anyone have any advice?

Thank you!

[Fred T.]

1) Review the existing lease agreements to see if they contain any language with regard to rent increases. Some lease agreements are written with increases tied to an index (CPI for example), or tied to the increase in annual taxes or just a set amount or percentage at the end of each expiration/renewal period. If the lease does not contain a provision, then get a new lease drawn up upon the expiration of the existing one with the language.

2) Does the units require any improvements or repairs to bring them up to the standards of your local market competition? If so, then you should complete those updates before addressing a rent increase. If not, then when your tenants are notified of the increase and go looking around, they will find similar units for similar rates and simply won't bother moving out to begin with. Your homework is very important though...if your units are not up to par, the tenants will vacate 8/10 times.

3) Send out your notice to increase rent pursuant to the Lease Agreement which is usually 30-60 days prior to expiration on an Annual Lease. 

4) During the same period mentioned above, start advertising your units to build a list of interested individuals. Worst case scenario is you have a waiting list if all your tenants stay on-boarded after the notice of increase.

5) Re-Qualify each tenant to ensure they are able to handle the rent increase. That involves reviewing their income and credit reports. If a tenant is "maxed out" already, then you will have to make a business decision. The last thing you want to do is to increase the rents and then have slow paying or no paying tenants controlling you. Be smart when making a value added decision.

The format of the letter is as simple as this outline:

Introduction of Self as New Owner

- Lay out a plan for the building (improvements, timelines, management, processes/procedures for resolution of issues, etc.)

- Factually describe the current market conditions (how many rentals within an x-mile radius are available, market rents, amenities offered, etc...basically paint a picture of the market.)

- Then close with: leases and past payment history along with the building expenses will be reviewed to determine if adjustments will be forth coming.

Ultimately a value added / stable building is worth more to the community, your neighbors, fellow investors, your lenders and even your tenants though they may not see that initially. When you treat this as a business, and you are fair and balanced in your decisions, then people will respect your decision and you will have a trusted name in the community and in this industry, your name/reputation is extremely valuable. Give your tenants some added value by painting the units, maybe update the kitchens/baths, change out that 4yr old carpet, etc...re-investments into your building is 9/10 win/win scenarios for all.

Good Luck!