Opinion on Rent increase

[Chris Harrington]

I think I know what I am going to do but would like to see what others think.

Closed on 14 units in late Sept fully leased.  Seller had a 4 pg lease for tenants with no other documentation, not even an application so I know next to nothing about the tenants.  Rents are under market in a popular area near downtown KC.  The rents for the 650 sq ft studios were averaging $625.  We have rented two now for $800 in the past several months.  One of our tenants recently responded to our Lease Renewal and Rent Increase letter and countered with $750 for the increase which is a $125 increase over her current rent.  She has lived there for 3 years and wants to stay.

Do I rent at $750 or stick with my number I know the market is currently supporting?  Our strategy has been locate and buy under performing assets, get the income up as high as the market allows, reduce expenses and then 1031 up.  Its worked really well and $50/month is $600/yr which roughly translates into $6000 value in a 10 cap.  If I set a precedent by acquiescing to her request, with 8 of these units I am potentially knocking $40k+ off the value of the property on the back end.

As I mentioned, I am pretty sure I know what I am going to do but curious as to what others think.  

Thanks

[Rick Bassett]

Chris,

Two things to consider:

1) It has been her home for the past 3 years, $175/mo may be too large of a jump for her to absorb at one time. If she hasn't been a problem tenant, I'd take the $750 offer for this year and tell her that the renewals will be $775 next year and $800 the following year.

2) What will your cost be between tenants? If the apartment sits empty for 1 month between then you lose $750 in 1 month rather than $600 over a year, not to mention any cleaning/repair/painting/marketing costs.

Rick