Increasing below market rate rents

[Monika V.]

Hi everyone! 

I have a family member who inherited a portfolio of houses in the bay area. They are all located in the southern peninsula within 1 neighborhood. This is great! The not great is that they are rented for an average of $850 below market rate. The range is about $400 - $1400, with about half of them around $1000 under. 

The plan is to increase the rent for tenants $1,000 under by around $800. The others would receive increases in a similar ratio. This is a huge increase, but still leaves the tenants with a discount. Has anyone else encountered this situation and taken similar action? What was your experience? 

[Roger Vi]

I purchased a 4plex that was drastically under market rent in 2014. I am in Everett, WA, which is 25 min from Seattle/King County, which a lot consider to be the next San Francisco in terms of real estate and rent prices.

We are in a very similar situation where rents are increasing faster than they ever have. If you haven't done rent increases every year, you are at least 5% under market. If you've waited longer than a year (such as your property), you are way under market.

My 4plex collected ~$2600 when I purchased and my goal was to raise to to ~$4000 within 3 years with minimal vacancies. The units were in rough shape so I pushed the rent increases to see if the tenants would move out since I wanted to update anyway. I raised them 3 months after purchase, 6 months after that, and one more time 6 months after. I've experienced three move outs in 16 months but currently collect $1100 more each month between 4 units since purchase. Because the rents are still rising, I have added another $450 to my initial goal and hope to achieve these rent raises in the next 2-3 years.

The good thing about rising rents is that it means your property is wanted. If you have money to do repairs, I would not be afraid of someone moving out. My last 3 move outs combined I had about 17 days total vacancy. If you plan right, it should not take you longer than 7 days to move a tenant in AFTER cleaning up.

Communication is KEY during this process. I always try to be as friendly as possible with the tenants I inherited. People's emotions are often times directly linked to their money situation. No one in the world likes to hear their landlord tell them rent is going up. You might see it on the news everyday and hear it from your friends, but the problem is not real until your actual landlord tells you its happening. Local government is a great scapegoat, I usually blame the increases on rising property taxes.

To help answer all your questions, I would post a test ad on Craigslist for one of the properties you want to raise rents for. Run the ad for 2-7 days and see what kind of response you get. If you get 20 calls/emails a day, your price is too low. If you get 5-10, your price is probably appropriate and I would consider this "market rent."

The day you run this ad matters. You will get more responses on Thursday-Saturday than on Monday-Wednesday. In a market like the Bay, this really shouldn't matter too much. Just more of something to keep in mind if you see huge differences in numbers day to day.

ONE LAST POINTER! I would make sure to increase the security deposits for current and future tenants if you haven't done so already. Security is usually 1-2 months rent. If you are under rented by that much, the security deposits may not be appropriate. This was one of the first things I noticed when I took over. The rent was $800-1000/month and everyone's security deposit was $300-500 because they've been there for years.

Hope this helps! Feel free to message me if you need any help. I've got some more random pointers for achieving max rent and low turnover.

Good luck!