How to Raise The Rent!?

Question

We purchased our first duplex last year and it came with two excellent long term tenants, (one left) and we were able to, in less than a month renovate and 're-rent for $300 more. The other units rent though was not raised in the last 3 years and they're 575$ under the going rate. We do have a good cash flow but we also know we are leaving money on the table. How do you rectify this with out being terrible to great tenants? They are month to month.

We would like a cut and dry mothod that takes the emotions of wanting to be liked out of it and makes it more of a business decision.

Ideas or advice would be appreciated!!

John Hickey · Answer

Reed Nixon I would send one tenant a communication that the apartment is under market. Explain to them that you need to build up a reserve fund for capex and hard times. Include some examples of market rate Apt's in the area. Give them 30-60 days notice if the increase and raise it up to market rate. If they want to leave because you've raised the rent look at what it would cost you to prep the unit and how much rent would you lose. Then compare the two numbers. If they really want to leave you can either meet them somewhere in the middle or get ready to turn the unit over. Once that process is complete get to work on bringing the other unit up to market. I like staggering the idea of increases so I don't have two vacant units. I learned this after raising the rents on two Apt's 400 each. Both Tenants walked. I had raised the rents from 1400 to 1800. Still a little below market but good enough for me at the time.

Thomas S. · Answer

"In that situation they have the upper hand on rents and being able to move out whenever they want."Every tenant regardless of their lease can and will move out whenever they choose. A term lease does not determine when tenants will need or want to move.The greater advantage of M2M leases is that the landlord has control over when tenants will leave. Landlords need not be concerned about good tenants it is the bad tenants that must be controlled.

Thomas S. · Answer

I would send notice that you will not be renewing their M2M lease unless they are prepared to pay full market rent. This will be a win/win for you. They either pay market rent with no effort on your part or you get them out asap, renovate and re-rented within the month at full market rent. New tenants, properly screened paying full market rent are preferred over trying to bring inherited tenants to market. Priorities long term profits over inherited or long term tenants that are not paying market. You want to get your business up to full speed quickly to generate the greatest returns.

David Van Brunt · Answer

I will be in a similar situation in a couple of weeks, with a 4-plex I am closing on... there was a great article on this recently here on BP--and I plan to use that approach.

James Mabrey · Answer

I agree with @John Hickey

Shaun Patterson · Answer

@Thomas S. you are right about tenants being able to move out when they want to. You are also right about not being as concerned about good tenants. There are definitely times to use each type of lease. I would not say only stick with a certain kind no matter what situation comes up. I will have to disagree on a few other points. When we build term leases we have built in safeguards for the properties cashflow. The leases are set up for one to help us during the time of year that the tenants lease might expire. You don't want to go looking for tenants during december since this is one of the worst times to find good tenants (most have already have moved in and are getting ready for the holidays). For example if you have good tenants in both situations and all of a sudden they get new job offers to move out of state. In the month to month lease that stable income from that tenant is gone in 30 days. in the term lease you have different options available to you to help offset this sudden switch in property income. You can go after the tenant for the rest of the lease or one of the different options we have set up: have a early termination fee, allow the tenant to refer another good tenant to the property and when they qualify have them pay a transfer fee and have them take over the remainder of the lease. Regarding the type of tenants being put in you should have already vetted most of the bad tenants before you even get to the point of figuring out if you should do month to month or term leases. Your management systems are also put in place to keep ether tenant in line and controlled.

Shaun Patterson · Answer

Another way you can set this up is by giving them options. One is to get an actual 1 year lease in place at the current rent they are paying plus 50-100 dollars. After that you want slowly raise rents every year. You then can also offer a 6 month lease at a higher rate but not as high as the market rate. Then the month to month rate at the full market rate. If I had been in your position I wouldn't have good tenants on month to month leasing at way below market rents. In that situation they have the upper hand on rents and being able to move out whenever they want. They will ether pick one of the options or give you the 30 day notice to move out. If the rental market is good in your area then just rehab and rent out at market rents.

John Thedford · Answer

I would consider gradually raising the rents to make rate if the tenants are that important for you to retain. I found myself in a similar situation a few years back. Over the course of two years I had about four rent increases to get the tenant near market rent. Now, I can gently raise rents each year without running him off. If they are excellent tenants, remember that replacing them MAY result in less than good tenants--that is always a possibility.

Caleb Heimsoth · Answer

I'd just raise it 50 bucks or so until the current tenants left