Just closed on four-plex and meeting with existing tenants....

[Eddie Sorrell]

Hi All,

We just closed on our first buy and hold property, a four-plex. The units are currently rented, but way under the market price. I reached out to each of the tenants, confirmed they are interested in renewing for another year and let them know we will have a new lease agreement and rent increase considerations. I really need to increase the rent by 18% in order to meet my ROI numbers and to get closer to the market. Any suggestions as to how any of you have approached this in the past. I realize that is a large increase ($100) just to kick-off our landlord/tenant relationship, but this is a business after all. Suggestions?

[Jack P.]

Like what @Danny Randazzo said, double check what you consider "market" rents.  I think some of the best advice I've seen on BP is this: You don't set the rent prices, the market does.  If you get it wrong, high or low, it will cost you money.  Say you raise the rent $100/mo and your tenants leave, but you were wrong in your market assessment.  The unit stays vacant for an extended period of time, and you have to lower the rent to fill it again.  

I inherited tenants for probably 80% of my rentals, and have subscribed to the philosophy of leaving them in place under current prices, letting natural turnover take place.  Check the vacancy history for your units.  If all the tenants have been in place for less than two year, you know that you will experience a decent turnover rate, and consider anything over a year to be bonus.  Raising the rents just accelerates that process.  Try not to create artificial vacancy if possible.  A unit is renting for $100/month under market rate at $800/mo will take you 8 months to recover 1 month of vacancy.  

The other part to consider is the rehab required for turnover.  Current tenants agreed on renting the unit as it is now.  That unit may or may not be in great shape.  If the current tenant vacates, you may have to dump a considerable amount of time and money to get it into condition to rent at "market" rate again.  

Through my personal experience, last year I purchased a 4-plex with all units full, knowing that they were each in rough shape.  They were all renting for $75-150 under potential.  I decided to leave the tenants in place until they left under their own conditions, because I knew that whenever one left, I would have to spend $10k to bring the unit up to a condition that would attract the tenants I was looking for.  I didn't want to spend $40k the first year, so I will keep the prices low and keep the existing tenants in place for as long as possible.  When they leave on their own, I'll do the rehab.