Raising rents on new acquisition

[Andrew Michael]

Hi all,

I am set to close on my first small apartment building next week (7 Units).  The current owner is about 50% under current market rent rates.  This confirmed by the appraisal report, local realtors, and my own DD and research.  The current tenants are all on month to month leases so that is the good news, if anyone moves out this is an obvious non issue.  The challenge is that some of the tenants have been there for several years and have never been late with payment.  This is a challenge because morally it seems wrong to walk in and double rents right away especially when a tenant has such a good history. 

I was wondering if anyone has had a similar situation and how they handled increasing rents on long term tenants.  I am thinking bringing them up to market rates over the course of a few years.  Is that too long, too short?  What are some strategies you have used to keep tenants happy in the midst of owner/ financial changes?  

This is particularly important to me for two reasons.  First I want to be fair and ethical.  Second, I have several other properties in the immediate area I am going to make offers on and thus do not want to build a negative local reputation.

Thanks in advance for ideas and feedback!

[Mindy Jensen]

How does the deal work without raising rents? Do you still make money?

Month to Month tenancy is easier to raise the rents on, but consider the local market. I'm not familiar with your exact market, but how long is it going to take to re-rent? Are you going to be able to rent as-is, or will they need work to bring up the rents?

If you can rent out quickly, and it won't take much to do it, then it's an obvious no-brainer. But there is on time history with these tenants, and new tenants may not be the same. Make sure you have enough in reserves to weather a couple of months without rent.

If it's going to take $50,000 to bring them up to 100% rent, and you're renting out at $500 a month, it's going to take a long time to just break even. So obviously if I had more numbers I could give better advice.

These tenants know they're below market, so an increase isn't going to be a surprise. I like the idea of raising the rent gradually - you're at 50% under right now, raise it 10% or 25% as soon as you are legally allowed to do so. Check your state's landlord tenant laws to make sure you have to give a 30 or 60 day notice.

See what happens the first month. Maybe a few leave, maybe a few stay at the increased rate without having to do anything to the unit. You rehab the vacant units and leave the occupied ones as is.

If you plan on raising the rent more than once, like 25% for 3 months then 50% after that, or 10% each month, or whatever you decide (and what is allowable in your state's laws) then give the tenant a heads up so they don't feel blindsided. Tell them you're giving them notice so they can find a new place if they would like, and be accommodating if possible. 

One thing that can help a rent increase is to fix something or offer something. Go through and talk to each tenant, and plan for a long conversation. Explain you are raising the rent, ask about any deferred maintenance, see if they have any special requests, and grant them. I remember one landlord installed a ceiling fan and the tenant was over the moon. 

If they want all new stainless appliances and the rent is $500 a month, probably that isn't something you should do. But if they have a gross old refrigerator and they want a new one, that new one will go a long way when it comes time to rent increases.

Good luck. Let us know how you did it.