How to raise rents....

Question

Hi Everyone, I'm a newbie to this forum. I've recently inherited several properties in San Francisco. One of them a beautiful 3 bedroom 2 bath home in the heart of the Excelsior district. The people who live in the home are long time tenants that have been there for about 20 years! The problem is their rent is $2000, which is about $2500 below the fair market rate. no rent control here folks! I need suggestions on how to raise their rent. Should it be done gradually or all at once?? I don't need to raise to full market just close enough.

If they decide to move, I do have funds to upgrade the place and I know it will rent out immediately as that location is prime (walking distance to Bart and muni). I know it's a business but I feel so guilty. Feedback/suggwstions

If they decide to move, I do have funds to upgrade the place and I know it will rent out immediately as that location is prime (walking distance to Bart and muni).  I know it's a business but I feel so guilty.  Feedback/suggwstions

Gabe C. · Answer

@Jing Tagle

I'd talk to your CPA about tax implications. I think you might be disqualified from some write offs if you aren't pulling in close to market rent. Unless they are friends of the family, I'd agree with Michael S.. Landlording is a business, and they would be taking advantage of you otherwise. If it seems like too much to stomach to charge market rents, maybe it would be better to just cash in your chips? There will be issues a lot harder to deal with than this in your future.

My sister in law just bought a place in Excelsior and her yearly property taxes are $20k. (Holy moly!) If you didn't inherit the old rate, you'll definitely jack up that rent when you see your tax bill. There's a reason market rent is what it is. :)

Account Closed · Answer

@Jing Tagle  Well, let's just look at what they got from your relative just last year.  $2500 x 12 = $30,000 in what they were subsidized by your relative in just one year.  And they had 20 years to save up and buy something themselves, including when the market crashed.

Actually, you have no idea how much money they have in the bank.  They may give you a sob story, but actually have a huge investment portfolio, and have decided that renting at the price they've been renting at, that it was smarter to invest their money than buy a house.

At any rate, your relative gave them a ridiculous sweet deal.  They knew this day would come.

Since you're not in rent control, unless there's some other SF law for non-rent-controlled units to give more notice, under CA law, you're required to give them 60 days written notice since they've been there over a year.  It's up to you if you want to be more generous than that.

It's also 60 days notice to raise the rent, when it's over 10% of the rent.

In case you don't have it, I highly recommend this book:

http://www.nolo.com/products/the-california-landlo...

Congrats on your inheritance!

Account Closed · Answer

It's just business, you do not owe these people anything. If they found something better they would be out of there in a flash with no thought of your needs. Their income and the general cost of living has increased over the past 20 years and they should be able to afford market rate.

Nathan Miller · Answer

Hi @Jing Tagle, Generally, I recommend raising rent slowly as we publish on this guide on how to raise rent on your tenants however, if it's $2500 below market rent I think you may need to work on immediately increasing the rent to market rate.  I would discuss it with the tenants and give them a graceful exit if they cannot afford the new rent.  But if you think you would have no problem renting it for $4500 and making an extra $2500 per month, it's an easy decision I think.  The renters probably well know that they have been getting an amazing deal and they don't expect it forever.

Just keep in mind that this is in fact a business and the same way that Costco doesn't sell a $4500 TV for $2000, you shouldn't be selling a month of rent for $2500 too little either.  Try to keep your emotions out of the decisions.

p.s. As Sue said above, be sure to give them proper notice when/if you do decide to raise it.  It's 60 days here in Oregon, and it sounds like it may be 60 in CA as well.

Jing Tagle · Answer

Thank you all for all the great advice.  I know I have to take care of business first.  You're right, @SueKelly about the tenants probably having a comfortable portfolio.

Gabe C. · Answer

You could also hire a property manager to do all of that for you.

Chris Eaker · Answer

@Jing Tagle

I'm sure those people know they're getting a sweet deal on that in SF. If I were you, I'd raise rent gradually over the next two years. Use 6-month leases so you can do it every six months. If they stay, then you're fine. But I imagine eventually, they will move on and you can do the renovations and raise it all the way to market rent. You are not a bad person for doing it.

How to raise rents....

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