How to raise rents on new purchase when they are 60% of CMR?

[Jim Costa]

I am in the process of buying 3 duplexes that are undervalued because of rents. They are renting for $800-850. Market rents for this size in this neighborhood. should be 1100-1200. Once you purchase how do you raise rents that high. It is a business decision to buy but how do you go in to somebody that has been living there for several years and pays rent on time and say you are going to raise rents 50%. We are not in rent control. I can do what I did before and ask tenant what is fair and affordable for a rent increase ( has resulted in $100 jumps), but this will take me 3-4 years to get rents to today's market rents. This is costing 20K a year in lost potential rents. Where is the line between a money hungry investor and a landlord with a heart.

[Marcia Maynard]

I'm basically in the same market as you. The Portland/Vancouver metro area is going nuts. Tenants are scared. The good tenants with fixed incomes are really hurting because of the unprecedented rise in market rates, which started with outside investors infiltrating our market. Are the units $300 under market because of recent new builds in the neighborhood or because other property owners are raising rents on their older properties to the max?

For us, we are okay with renting our houses, duplexes, and 8-plex units below market rate and we still enjoy a good cash flow on each of our properties. We value offering housing that people can afford and we benefit by keeping good long-term tenants. By long-term tenants, I'm talking at least 5 years and closer to 10, 15, 20 and even 25!

Tenants won't warm up to your need to make an investment that garners an appropriate return for you. Tenants want a safe and comfortable home they can afford, without spending more than 30% of their income on housing. Many families in our market are now spending 50%-70% of their income on housing or doubling up with others to keep a roof over their head. The suffering is real.

When we bought a run-down 8-plex ten years ago, the first thing we did was introduce ourselves with a letter that stated we were "not raising rents at this time." That put the tenants at ease. Then we set up individual appointments to inspect each unit and get to know the tenants. We asked them if there was anything that was not working or in need of repair. We demonstrated that we cared about their needs and were eager to maintain our property. We addressed all deferred maintenance and focused on safety improvements. Next we made some cosmetic improvements. Most of the tenants really warmed up to us and were eager to sign our new rental agreement and comply with our property rules, which made managing easy.

A few tenants left on their own, as they were not comfortable with our management style. We lost two tenants with pit bulls that caused a lot of property damage, one stripper who had frequent late night visitors, and another tenant who got behind on paying rent. Sure beats needing to do evictions when tenants recognize that living in our properties is not a good match for their lifestyle and leave without incident. As we made improvements, we slowly raised the rents in a manner to keep the units affordable and to meet our income objectives. We made our first rent adjustment three months after purchase and no one objected.

We have always kept our rents affordable. For our 2BR/1BA units, the most we've raised rent in a 12 month period of time was $100, but we usually do rent raises in $30 increments (that equates to a $1 a day). We also don't raise rent every year and never by more than 10%. Many would say we are leaving money on the table by not responding to the push to raise rents in our market. But we sleep well at night and have good tenants who take care of our properties and pay rent on time. Our longest term tenant has been in the same apartment for 26 years! Our niche is in providing respectable housing for low-income and fixed income responsible renters.

There are of course many factors to consider. Are you a community player or a community taker? What is your ideal tenant and how will you market to them? What is your property management style? How do you want to spend your time? Is the extra money you can garner from a property worth the increased turnover or the extra wear/tear when units are housing the maximum number of occupants? It also depends if you are aiming for "A" class rentals, because that is another ball game. We aim for "B" class. We're okay with buying a "C" class property and improving it and the neighborhood to bring it to "B". In the end, you need to decide what is right for you, your family, and your community. Good luck!