How to raise rent on a 10-year tenant

Question

Hello, BiggerPockets Members! I have been a member of BP for 1.5 years now, and can't thank this community enough for the all the knowledge, information, experience, etc everyone has shared/provided.

I recently just graduated from Illinois State University and have signed a purchase agreement to take over my Godfather's Triplex, that I've been eager to get since I started BP. I won't go in depth with numbers, but I will provide some information to help understand the current situation.

One current tenant has been living in the Triplex studio for 10+ years now. He collects disability checks which help fund his living expenses. Tenants only pay their contract rent amount and electric bill. My godfather has stated to me, "He hasn't been under contract for almost 8 years now, has smoked in the unit for 10 years, and hasn't had the electric bill put in his name but pays extra on top of his rent every month."  This tenant currently pays $350 for the studio plus electric. Studios around the area range from $500-$600.

My question for you, BiggerPockets members:

How do you raise the rent on a 10-year tenant? - without making them upset, packing their bags, and leaving me with a unit that will need scrubbed down, repainted, and many repairs to get the next tenant in there.

Thanks in advance for all the feedback, and best of luck to everyone in 2019!!

Thomas S. · Answer

You tenants have been on M2M for 8 years, this is good.

First thing you need to do is tell yourself you are not your Godfather. The business is under new management and with that comes sweeping changes. Out with the old in with the new. If that includes the tenant so be it. It's a bright new business day and in all frankness you would be farther ahead starting your new business with all new tenants.  You do not want your Godfathers old tenants telling you everyday how he ran the business.

You could raise his rent slowly over time to inflict as much prolonged pain as possible on him, if that is your nature, or send notice he is going to full market and that the electric needs to be in his name. Simplify your business now.

"How do you raise the rent on a 10-year tenant".....the same as you would for any tenant ... you send proper notice as outlined in your state landlord tenant regulations which I am sure you have learned already.

"without making them upset bla bla, bla." Sorry I do not understand...you do it the same as any tenant as outlined in your state landlord tenant regulations. Keep your feeling out of your business.

Crule to be kind.

Greg M. · Answer

You sound fearful of losing this tenant and having to rehab the unit  before you can re-rent it. I believe this is the absolute wrong  approach. Rehab costs don't go away, they only get pushed off. It is usually the correct decision to take the action that will get you to market rents the fastest.

What will the rehab cost you? It sounds like there is not damage there,  just not updated.  Given it is only a studio and the low rent averages, this is not a high  end area and the cost of rehab is not going to be crazy. Assume a near  full gut job, repainting, vinyl flooring, newer appliances, some  faucets, a shower head and new toilet, change a countertop or two, some  pre-fab  kitchen/bathroom cabinets, maybe throw in a broken window and screen  replacements  and some minor plumbing and electrical repair? What is that, maybe $5K-$7.5K?

Option 1) You spend $0 on rehab right now and are able to increase  the rent with the current tenant a little. Let's say you get an extra  $75 a month ($900 a year) as that is probably max difference the tenant  could afford. Those rehab costs were only pushed back until this current  tenant leaves/dies. Assume the tenant stays 10 more years, by that time most of that extra money you  collected will go toward the current inflation adjusted cost of the  rehab. You may put a little extra in your pocket. You've basically broken even on the rehab in 10 years.

Option 2) You raise rent to market. The tenant leaves. You have to do  the rehab now. Assume you do a full rehab. You can now advertise the  unit as completely remodeled and you should be able to charge a strong  price. Lets assume middle of your range, at $550. That's $200 more per  month ($2400 per year). In 2-3 years you've paid for the rehab and from that point you sit back and collect $200 more every month forever.

Dennis M. · Answer

@Shaye Mora

How do you do it without making them upset lol ?

Look You need to immediately change your mindset if you want to be successful in this business ...and This is a business not a charity . Tenants will generally have little concern or appreciation for their landlord so get this nonsense of pleasing them out of your mind ! Send him a letter that the unit has been under market for a long time and you intend to raise it up to the correct value . Inform him it’s going up wether he stays or leaves .

Morgan Klein · Answer

You shouldn’t have a tenant without a signed rental agreement.  That should be your biggest concern.  It opens you up to all sorts of potential issues.

The simplest solution is offer him a contract at market rent, and then hope he moves out.  Then you can clean the apartment and get a new tenant in there, under contract, at market rent.  Worst case scenario, he signs a contract for your asking amount and stays.  Now you’ve killed two birds with one stone - got him under contract and raised the rent.  Make sure you put a no smoking clause in the contract....

Robert Biggerstaff · Answer

You’re not the Red Cross so don’t act like a charity… When you do not charge market rents you’re doing yourself and other landlords a great disservice. I assure you something Major will have it sometime and you will need cash reserves to be able to make the repairs. The money that you’re avoiding at this moment you should be asking yourself what is your fear from living in abundance

Ray Harrell · Answer

Check your local laws first. There may be a ceiling on how much you can raise at one time or per year. I would suggest not doing a one year lease so you leave a way to raise rent multiple times per year in small increments. Piece of advice, as SOON as they are 5 days late, no matter the excuse, serve a 5-day notice and follow through.

Greg Lemmon · Answer

I worked with an investor a while ago that had the same problem. He had mostly tenants that depended on the state usually through disability. Whenever it was time to raise rents he would just move tenants around to different vacant units and said he needed to do renovations on their current unit, or when no other units were available he would raise rent and do renovations while they lived there. This way he got a little return and normally people were okay or even happy with the new rent as their unit was just updated. By updates I don't mean go crazy either, just paint, carpet, fixtures something like that that adds a lot of value in the tenant's eyes and makes them appreciate there home a lot more.

Mary M. · Answer

@Shaye Mora i would just have a conversation with him and let him know you will need to raise the rent x amount.   I would pick an amount that is not quite as high as market rent and then just let him know in x days (i use 60, but check your local laws) , the rent will be x.

He may object, so if you want to keep him then perhaps give him an update of some sort, or negotiate the increase.

I have found that  unless you are dealing with hard core people, its best to start dialog in an open, professional , friendly and straightforward manner. Only if the tenant takes it elsewhere will I play the hard a$$ LL role. :)

Nathan Gesner · Answer

@Shaye Mora

Let's say the unit is $150 below market. That's $1,800 a year that you are losing and gifting to the tenant. In exchange, he's clearly unconcerned with your rules and damaging the unit with his smoking.

You could hire a professional to clean and paint the place and rent it for market to a tenant that respects the property. You'll break even the first year (at least) and then see a 40% increase in income the second year.

The other option, which I've used a lot, is to hit him with an increase but keep rent a little below market rate so he doesn't leave. For example, you could bump him to $450  and cut your losses to just $600 a year but you don't have to deal with vacancy, turnover costs, etc.

I guess it depends on how badly you want to keep him.

Shaye Mora · Answer

@George Skidis Appreciate the feedback, George!

How to raise rent on a 10-year tenant

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