Raising undermarket rents on long-term tenants

[Susan Leake]

I bought my first rental property in January. Two of the tenants are paying undermarket -- one by $150 a month and the other by $125 a month. They are both good tenants, one is a retired couple eight years of occupancy (and no rent increases during that time!) and the other performs various tasks in exchange for lower rent, with cost of materials deducted (primarily in his own dwelling and at his own choice of project!). I have put a stop to the latter's "projects" because I have some major capital improvments that must be made. I want to bring his rent up to market and then, as needed pay him for projects that I specify. Both tenants voluntarily help to maintain the property -- grass cutting, snow removal, keeping sidewalks clean, repainting their apts, etc.

Does anyone have a strategy to suggest? The rental arrangements were very informal -- no leases and no applications, so I have no idea of their financial situations. However, to jump the rents by the whole amount in one fell swoop would quite likely result in losing the tenants, which I would prefer not to do. I will be doing improvements to all apartments (two of them new furnaces and one new appliances), as well as other repairs, etc. Thus, there'll be visible added value.

Has anyone used an incremental approach in this kind of situation, e.g., giving the tenants a schedule of planned increases. I will appreciate any suggestions for dealing with the situation.