Tennessee Rent Increases

Steve Bruza · 2018-02-21T12:12:40-08:00

Interested to hear how many of you handle rent increases. Here is what I do currently. All of my leases are 12 months and are renewed if someone chooses to stay. I contact them 60 days out from the expiration of the lease. I increase the rent every other year and usually I try to keep it modest, around 5-6%, if they have been a good tenant. But with rising CLI (cost of living index), property taxes and insurance, I have fallen behind the FMR (Fair Market Rent). I am a pretty active landlord and probably have higher expenses than some landlords as it has been my policy to take care of my properties to get good tenants. I have a very low vacancy rate and I like to keep my tenants. More than half of my units have tenants that have been with me for more than three years. I have a 3BR/1Bath unit that is currently getting $900 per month on an inherited lease. I know it needs to go up and the tenants know as well. The IRS is saying that FMR is $1,328 but that would mean a near 50% increase in rent. It still needs some additional work and the tenant owns all of the appliances. My debt service is about $540 per month.Any thoughts? I appreciate any input.

Nicholas Richard Ray

O Fallon, MO · Member since 2017 · 59 posts · 21 votes

8y

I haven’t personally had to increase rents yet. I nearly did upon getting my duplex late December. I got the tenant in a 3 month lease to end at a more favorable time and let them know rent was likely to increase at that time and I would only be offering a 1 year lease. Upon further though I decided to wait to increase rents until I had improved the property more sufficiently. The tenant has been great so far and was happy that I decided to wait on the increase - time will tell how valuable those brownie points were. I feel you may be in a similar situation. All things considered, I’d say you could have an honest conversation with the tenant and do a modest increase to help you increase profit and get closer to market and the tenant, who I assume has been there with the unit not fully updated already, doesn’t mind staying in the less attractive unit for the more attractive price so it still helps them. You sound like you plan to renovate at some point so I would say wait for that project until that tenant moves on completely. Then your market rents would be completely justified with a fully rehabbed unit. Best of luck as always!

0 Reply

Paul Allen

Nashville, TN · Member since 2018 · 8 posts · 1 vote

8y

I'm sorry I am a total newbie here, researching still before I take the plunge. you mentioned "The IRS is saying that FMR is $1,328 but that would mean a near 50% increase in rent". Are you saying that the IRS taxes you on the FMR and not what you currently bring in on rent? Sorry if I sound stupid here but I am learning a ton. Also looking in the TN market.

0 Reply

Steve Bruza

OP

Investor · Lebanon, TN · Member since 2015 · 18 posts · 3 votes

8y

Nicholas,

I have found that waiting on improvements to increase rent works better. Tenants know the area they are looking in and if you try to charge too much they will pass on your property. I noticed you are from O'Fallon. My wife and I met while in the Air Force. She spent seven years at Scott AFB many, many years ago.

Paul,

Tennessee doesn't have any statutes from the Tennessee Uniform Residential Landlord and Tenant Act regarding rent increases. I keep a PDF on my desktop of this statute for reference. Its pretty easy to find, but the two parts I spend the most time with are 66-28-201 and 401.

As for this conversation, the IRS asks if you are charging fair market rent. If you are not, then you cannot claim a loss on that specific property. Your expenses and depreciation are limited to your income on that property. So if you only collect $5000 in rent and you remodel the unit or making significant repairs, you will be limited to that $5000 and your net income will be zero. We use those "losses" to help reduce our taxable income as rental income is considered passive income. In the past, the FMR has usually been lower than local rents, but with the spike in residents and the popularity of Nashville, sales, rents and property values have skyrocketed, as I am sure you are aware.

1 Reply

David Schwan

Manchester, TN · Member since 2016 · 67 posts · 9 votes

8y

Steve,

I would say IF this is a good tenant and they are fine with staying in the property as is then I would negotiate with them on what is a fair increase. They know as well as you that the rent for the property needs to go up. My opinion is rent between $1,100 and $1,200 would be a fair number. In this market they would be hard pressed to find a better option. It would be a win/win for both of you. You get to increase the rent on the property and they still get housing at a lower than market value. As far as the IRS do you have any recourse to dispute their FMR number?

Best of luck,

David

0 Reply

Steve Bruza

OP

Investor · Lebanon, TN · Member since 2015 · 18 posts · 3 votes

8y

David,

I am right there with you on the rent amount. I emailed them this morning to begin discussions so we shall see how it goes. Their lease isn't up until June so they have a little time to consider it. I was wondering about the dispute option as well. I haven't found anything that says you can, but I have found several HUD documents determining CLI (Cost of Living Index), Fair Market Rents by State and County as well Section 8 rent values.

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

8y

If market rent is $1300 and your tenants decide for personal reasons that they are moving what would you charge the new tenant. Charging $1200 is a win/lose in favour of tennats.

If they move today as opposed to moving in the future what is the difference in your the cost of turnover. If you increase rent to market and they move as opposed to charging below market and they move in the future what is your net loss. $100 + per month till thy leave. That is about a 8% loss per year. What line on expenses is that listed under ?????

Bottom line is there is zero financial advantage to charging below market. To do so is a decision to not manage your investment to it's potential. It is poor business management based on being a lazy landlord.

This thinking is false economy built on avoiding having to manage your property. Vacancy/turnover costs are built into your finances. I have never seen a expense calculation when evaluating a property for voluntary below market rents. Who builds unnecessary wasteful losses into a business plan.........lazy landlords.

Pay now or pay more later.

0 Reply

Steve Bruza

OP

Investor · Lebanon, TN · Member since 2015 · 18 posts · 3 votes

8y

Thomas,

Thanks for your input. I would be careful throwing out terms like "lazy landlord" to people who are logged in to a forum like Bigger Pockets looking for advice and knowledge. We are all out to make money and I suspect that we each have developed our business plans based on our own experiences. I have been doing this successfully for 20 years and I still love to come to a site like this to share experiences and get input from other investors.

0 Reply

Angelo Wong

Investor · Milpitas, CA · Member since 2015 · 71 posts · 72 votes

8y

@Steve Bruza

This is how my PM does it:

3% increase for a renewal of 2 years. 5% increase for a renewal of 1 year. Though this was for a property that's $1395/mo in Cordova area.

The same PM did NOT increase a similar property, however, that I am already charging $1610/mo for ($1585 base + $25 pet rent). This one is Windyke country club area. Same school district as the other SFH.

I'd say charging FMR is good and if you might even think of it as you losing $400/mo per property currently. Keeping tenants is nice, but losing $400/mo per property I think outweighs a turnover by a lot. However, it really depends on what is in your warchest and how much turnover expenses you can absorb in the short-term. If you had $10 in your bank account, I wouldn't recommend a turnover, but if you had $100K in your bank account, I'd increase rent sooner than later.

Think about it: you're going to eventually want to charge FMR, so procrastinating only hurts you if you have the means to do it sooner than later.

0 Reply

Tennessee Rent Increases

8 Replies