First Property - Inherited Tenants Paying Below Market Rent

[Cody Wilson]

Hello everyone, this is my first time actually getting a chance to really get out there in the discussions. I am under contract with my first property, which is a 4 unit building with inherited long term tenants.

Currently the tenants pay $475 in rent, roughly $75 under market rent per unit($550 for 2BR). At the moment, the current landlord pays water/sewage for which the tenants then reimburse him. On average the water/sewage bill per unit is ~$41mo. 

I was hoping to hear how risky it sounds to raise the rent to $550 and cover the water/sewage bill myself without spooking off my current tenants. Any idea how to explain the price increase? ... Should I simply state "In order to be more in line with current market rents along with now covering the water/sewage bill for a more streamlined lease agreement, etc. etc."?

[Nathan Gesner]

You have to balance your decision with the risk/expense of a vacancy. 

Let's say you wanted to raise the rent $75 a month. The tenant can't afford it and moves out. The unit sits vacant for a month before the next tenant moves in. Your decision cost you $550 plus utilities but let's be nice and say it cost you $600 total. Your attempt to earn $75 more a month cost you $600 so it will take 8 months to break even.

If you have good tenants that you want to keep, consider raising the rent in increments. For example, you could ask them to sign a one-year extension with just a $40 monthly increase. This keeps them below market and keeps you from dealing with a vacancy. I've also split large increases over a one-year period like $25 now, $25 in six months, and $25 after a year.

If you have low-quality or bad tenants, you may want to hit them with a full increase as soon as possible just to scare them into moving out.

There are a lot of variables at play. Consider all your options. Once you decide, treat it like a business decision and move forward.