Rent- Raise or not?

Question

I'm owner occupied in a duplex. My tenants that live below me in a large 3bd/1ba unit have been there for almost 3 years now. I rent the unit for $700. I've never raised their rents. When I purchased the property, I think the rent was only $600 or $650. I ended up evicting that tenant but I raised rents before I accepted the new tenant. My current tenants are AWESOME. Very rarely complain, pay rent on time, are respectful, are understanding when things need to be fixed. I don't really want to lose them.

Here's my dilemma: The apartment is decent, but the kitchen is getting pretty rough. It's got 20+ Yr old peel and stick tile that's chipping up all over the place. The cabinets are hideous old walnut colored particle board and the corners are chipping. It really needs a full kitchen gut and rehab. I don't really want to do the rehab while my tenants are living there though. The subfloor is somewhat wavy, so I really want to take my time when I do the kitchen and try to fix the floor properly so I don't have any issues in the future.

My question:  Would you raise rents without doing any repairs or improvements to the property? I think this unit could probably support atleast $750-800 even in it's current condition. I'd really like to rehab it and get $900+ out of it. But I don't want to raise rents out of nowhere and lose my tenants either. They're currently on a month-to-month lease agreement.

What are your thoughts?

I'm also closing on a 6-plex in 2 weeks, so I want to get out of any habits I may have of just letting things slide simply because my tenants are in the same building as me. I need to treat this like a business.

Dana Dunford · Answer

@Dan Kelley- I think that you're on the right track with your thought process. Here are some points that may be helpful to answer that question ... should you raise rents:

• Leasing burden: How difficult is the leasing process for you? I assume it's not too much effort (after all, you live upstairs). If you raise rent and the tenant decides to leave, then you won't be in as bad of a situation as others.
• Rewarding great tenants: The grass is not always greener on the other side, and you want to reward great tenants. 
• Running the numbers: Before you do the rehab, I would put together an Excel sheet outlining the cost of the rehab, the expected additional rent, and the lifespan of the renovations. This may help you understand if it truly is a good ROI.

In my opinion, it sounds like you could raise rent ~$25 per month, with the situation being a win-win. You are not as far below market value but your tenant is still below market. Also, you can give a heads up that it will be raised again in 6 or 12 months, to give your tenant more transparency and set the precedent that rent is raised (not stagnate from 3 years ago).

David Moore · Answer

@Dan Kelley

I like all of Dana Dunford 's points, because it really is important to get everything back to the numbers.  But another thing should be considered.  What are market rents for the area.  I often see comments that we raise 1%, 2%, etc.  That can result in serious loss of income.  Check market rents using (www.rentometer.com) and check actual rents in Dubuque for similar properties on sites like (www.hotpads.com).  I just checked, and the median rent on a 3 br is in the 900 range.  That is a lot of lease loss.  I recently increased rents in a 4 plex I purchased by 16%, and I have not lost a single tenant (well, yet).  Because I set my higher rent in the lowest quintile of market rent for my area.  Hard for tenants to find a cheaper place.  Try to keep emotions in check, and stick to the math.

Dan Kelley · Answer

Dana Dunford Thank you for the reply. I like your perspective and I think the $25 raise would be a good starting point. It's a step in the right direction and will be a good stepping stone to inform the tenants that it's to be expected to have rent raises occasionally. Thanks again.

David Faulkner · Answer

I think you may be over thinking it. If the rental comps for similar units are more than what you are currently charging, then raise the rent. I always try to be right at comparable market rent, but also try to go with slightly nicer (but still affordable and durable) finishes than my competition to provide a little extra value, which translates into less turnover.

Martin Zawarski · Answer

I always raise  rents on the anniversary or the renewal of their Lease.   I also include a chart showing the tax millage charge for their home now and what it was a year ago and I do the math showing how much it has changed the taxes I pay.    If there are any increases such as water and sewer,utilities, common elements, insurance, I also mention that and let them know then what the rent will be increased to.  If I never raise rents I would be losing money each month. Remember your value is determined by the rents that you get.  And if you are not raising the rent and your expenses are going up,your value is going down and you'll go broke. By showing tenants how your cost have gone up I find that they never complain.

Jeff B. · Answer

My last move-out was a tenant of EIGHT years, renting at $900.

Why kill the goose that lays golden eggs?

After the period of time, I did a complete make over, especially the kitchen.

Offer good rents and keep them stable and your tenants will keep YOU stable in return.

Lee Smith · Answer

We put a 3% annual rent increases in the lease. This way they know up front it will happen a year from now... On your $700 rental that is $21 extra a month or $252 a year.. Nothing major, but it adds up especially over the long haul! Some landlords I know increase by 4-5+% each year... That's up to you... I would definitely raise the rents.  Small increase they will not give you too much grief over. Besides if you can really fix it up and get $900 a month, you can bet they know they are under market value.

I have used a rent increase to force tenants out. We had a situation where an inherited tenant was abusing a house.. So we raised her rent up pretty heavily to market rates.. We figured if she stayed we would get some extra profit to afford the repairs we were going to have to implement.  Problem with this strategy is that you need to be prepared in case they decide to move out and you have to complete the repairs.. hehe

Douglas Snook · Answer

If they are not complaining about the kitchen, why take on the renovation? You are going to be busy enough with the new property. If they are complaining and you are constantly fixing items, maybe you can explain its time for a new kitchen and a higher rent. If they are Ok with all of that maybe they could move to your new place temporarily and then move back after the reno?

Why raise the rent? have your carrying cost gone up? I expect your real estate taxes have at least so I would raise the rent $25- 50 bucks. See what they do.

Kimberly H. · Answer

We raise rents every year so the tenants are used to the concept, but if they are good, and the market hasn't gone nuts, we raise it only $5 or $10, which isn't enough to make anyone seriously consider moving.

Chances are if that kitchen is in that kind of disrepair that it's going to attract tenants that aren't as good as the ones you have. Also, given you're going to be busy with a new 6-plex in two weeks, do you want the added burden of finding new tenants because you raised the rent $50/month?

Jacob Sampson · Answer

I think Dana hit all the right points.  I don't personally raise rents on good tenants but it certainly isn't unreasonable to do so.

Rent- Raise or not?

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