I'm a bonehead(?): I agreed to PM suggested large rent increase

General Landlording & Rental Properties
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I'm a bonehead(?): I agreed to PM suggested large rent increase

Marco G.
Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
I purchased a number of adjoining properties mid last year. This unit came tenant in place on their first year lease. My first lease renewal of 2016 comes up next month and PM suggested a 9+% rent increase. I was very apprehensive about such a large increase and discussed it with them and they didn't think it would be a problem, and if it was, they'd ask for a "counter offer" now that they knew I was willing to be flexible. All of this seemed contrary to how I would do it myself, but the increase would bring it up to par with new leases over the past few months AND I'm really trying hard to not be such a micro-manager. I also expressed my apprehension especially because the property will require a month of vacancy and a few months worth of rent in rehab/updating with what needs to be done. Oh yea, and the leasing fee. Tenant immediately put in their notice to vacate. Tenant always paid on time and never made any frivolous service calls. I let them talk me into it against my gut feeling and feel like an idiot. I'm sure I'm not the first, has anyone had experience salvaging the tenant relationship in this instance? I feel like I can't really go back and say "just kidding, no increase for you"...
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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y

Disclaimer: I am not an expert in how property management compensation plans work, never having used one and it not being relevant to mortgages except as a single line on Schedule E of tax returns.

Your PM company gets paid more when a new lease is signed, than they do when a great on-time tenant extends their lease for another year for another year of on-time money in your pocket? 

Wouldn't that kind of create a perverse incentive to have tenants move out each and every year, so they can get a new leasing fee? Thus, is it the case that your PM company got paid MORE for screwing this up than they would have gotten paid for doing what you wanted? 

I'm not rocket scientist, but it may be worth just being completely 100% honest with the tenant one-on-one about how it played out and how it went down. A reasonable person might just understand, and decide that she wants to continue to be your excellent tenant. 

Aaaaand then go renegotiate that agreement with the PM company. If you appreciate stability and reliability, the PM company should be paid more when a tenant stays on for another year, and less when a tenant vacates. If that's what you want, anyways.

Again, I'm no rocket scientist, but I kind of think the folks working for me should be paid more for producing the outcomes I want, and less for the outcomes I don't want. My folks get paid more for fast or on time closings (whichever the clients want), and for clean loan approvals (relative to the borrower's situation). 

Because that's what I want. You get what you pay for.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    I like to buy from hobby landlords that molly coddle their tenants. Lower than market rents means lower market value of property. I prefer to buy from them in areas primarily corporate dominated as corporate business philosophy parallels mine.

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  • James DeRoest
    Investor · Century, FL · Member since 2015 · 950 posts · 603 votes
    10y
    Originally posted by @Marco G.:

    I also expressed my apprehension especially because the property will require a month of vacancy and a few months worth of rent in rehab/updating with what needs to be done. Oh yea, and the leasing fee.

    .

    ^ This bit here. Bingo. Downtime usually costs more than keeping the rent the same.

    But, here's the rub, the property manager has two customers which he needs to gouge. You, the landlord and property owner, and the tenant. Everything he does is an opportunity to shake each of you down.

    The property manager isn't making his money on 10%. He makes his money in late fees, call outs that he gets 10% of the invoice for, and so forth. He makes so little money when things are going right. And evictions aren't done at cost either.

    Things were going right with you and your tenant, and yes, you let the PM screw you.

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    10y

    We allow existing desired tenants to get below market on the rent before starting to raise the rent.  We typically attempt to not let rent get more than $200 below market before raising the rents.  When we raise the rents on good tenants we are confident that the tenant will have a hard time finding another place at their increased rent.  We typically have no concern of them giving notice due to the rent increase.

    We realize that we are losing rent revenue.

    However, we are gaining the following: long term tenants, rare vacancies, not having to look for another good tenant, the risk of changing tenants, the cost and labor to prepare the place for a new tenant.  Note that half a month rent at $2000 it $1000.  If the place is in good exit condition that is typically our minimum turn around time (it is difficult renting a place until unit is vacated).  Longer term tenants will require more time to prepare the place for the new tenants even for quality exiting tenants (things need work after 5 to 10 years or a tenant being in a place even if they took care of the place).  Add in the costs of the repairs and I have no plans to change our current rent increase policy (it works well for our busy lives).

    I recommend talking to the tenant and finding out if the rent increase was the primary reason for them giving notice.  If it was there are some options including providing assurance that the rent will not be going up for a while or doing the well because you are such a good tenant would it help if I increased the rent 50% now and 50% in 6 months.  So I would put forth at least enough effort to have get a feel for if they can be retained and at what expense.

    Good luck

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Dan your approach is very much in line with the part time/hobby type landlord and works best for those seeing income investment properties as a passive investment.

    As a business investment properties can not be allowed to sit below market rent. 1000 doors at $200 a month below market is a loss of $200,000 per month or 2.4 mil/year. 

    Percentage wise it is the same for big or small investors so I can not embrace the mentality but to each their own.

    Also in my opinion rent increases are not the reason tenants move. A rate increase may trigger the move but the reality is tenants are already thinking about moving before the increase and would have moved anyway. Tenants expect rent increases.

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