Inherited Tenants > Raised rents! WHAT WILL THEY DO!?!

[Matt Romano]

I'm the proud owner of my first 2 family property that I recently closed on this month.  It's fully rented with tenants in both units on month-to-month leases. I sent a termination letter to the upstairs tenant as I will be occupying that unit.  And I have been overwhelmed about presenting to the downstairs tenants about a rent increase, and wanting them to sign a year lease. They pay $1150 currently WITH utilities included (short of electric).  And my research shows that market rent for this property is really upwards of $1300, maybe even $1350 considering utilities are my expense. It's a very spacious (over 1,400 sq/ft) 3 bed 1 bath in a great location. And there's only 2 people living in that unit, which is a plus to me. Anyway.... I met with them this afternoon, and explained how a rent increase is necessary, and how I'd also need them to sign a year lease instead of the flexible and risky MTM they're on now.  I explained that I'm a reasonable person, and how I thought the $1300 range would be a bit too aggressive of a jump (despite market value), so I told them $1275.  They were very understanding, and I told them to think about it.  They asked me if I wanted Augusts rent checks, which I was very impressed by this (early payment FTW).  We spoke a little afterwards, and they're hesitant about signing a year lease, and asked if they could do a 6 month.  I told them that signing to a year was really a must. I told them I'd rather have them sign a year @ $1250 than 6 months @ $1275.  We ended the conversation saying that we'd all sleep on it and touch base tomorrow.  Basically just really looking for everyones opinion.  They seem like great tenants, really.  I honestly don't want to deal with a vacancy at this point, I have too much else I'm doing with the property to add that into the mix. And I would really sacrifice the rent amount ($1250 instead of $1275), if it meant locking them in for a year.  Do I stay firm with the year lease required? Negotiate the term? or the price? All thoughts and comments much appreciated in advance!!! 

[Jim D.]

Good steady tenants are very valuable. If you have to discount a little to keep them, don't sweat it. $25 per month over a year is only $300, which is the same as one week's vacancy. 

My total returns are always higher when I keep the rent slightly below market value, get multiple applicants, and therefore can choose the best ones. Then, I have almost no vacancy because they never want to move when the rent is slightly under market. Every market is different, but that earns me more in the long run.