Increasing rent on inherited tenants

[Jeff Plair]

Morning BP, So I recently purchased three properties that had current tenants in them. The Rents were way below market value with these tenants. What do you think is the best way to go about increasing the rent to match the market?

[Marcia Maynard]

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I would rather keep good tenants that pay rent on time and take care of our property than raise rent just because that is what the market will bear. Vacancies and turnover cost money that is hard to recover. Raising rent by modest amount usually works in places that haven't seen a rent increase in many years, depending of course on the type of unit, size of the unit, condition of the unit and current market rates. Of course you need to honor the current lease until it runs out. But then you could choose to rent month-to-month (allows for greater flexibility) or enter into another long-term lease (locks you and the tenant in for a specific period).

Raising the rent immediately after you buy will make establishing a good relationship with your tenants harder. If you do need to raise the rent, you can do so in small increments and I suggest no more than 10% at a time. Unless you are renting high-end properties, a rent raise above $50 will generally be met with resistance. We prefer $30 increments, that equates to $1 a day, and seems to be manageable for tenants in our market, even for low income/fixed income tenants.

Also, you don't necessarily need to raise the rent or even start a new long term lease now. I would advise getting to know your tenants and address deferred maintenance first. Let the current tenants go month-to-month until you sort out what will be best for you and best for your tenants long-term. When we purchased an occupied 8-plex awhile back, the first thing we did was introduce ourselves, our management style, and our rental agreement to the tenants. We told them we weren't raising rents at this time (that put them at ease and gained their trust & cooperation), then we inspected all the units and focused on health & safety issues and deferred maintenance. Next, we made some improvements to the property. Lastly, we raised the rent to a reasonable level after 3 months of ownership. It made the transition smooth for the tenants and smooth for us.