How do you deal with pushback from increasing the rent?

Question

I've been looking at some small multi family homes on the MLS in Chicago and it seems like a lot of the rents on there are below market. I assume that the rents are placed by the seller's agent and are accurate. So I asked myself why are the rent low? Below are what I came up with.

1- the seller fully owns the property and doesn't really care about increasing rents

2- the seller doesn't keep up with the market and don't know he/she can increase rent

3- the seller is worried increasing rent might drive the tenants away

I figure investors like to see the low rent and have plans to increase it once they acquire the property. I always wondered how hard it was to do that? Let's say the tenants have lived there for years and always paid on time and kept the place in good condition. How does an investor come in and tell them they'll have to pay $200+ and risk loosing them and having the property(ies) vacant. How do they make that decision?

Scott Mac · Answer

Hi Pierre,

If you come in and tell them the rents going up by $200 you will probably lose them.

Many people live paycheck to paycheck and $200 a month is a lot of money to many renters.

If you want to know what the place could rent for go visit 4 or 5 very nearby places that rent for what you think is market rent.

Then go visit the target property. Note any differences, because prospective tenants certainly will.

What I'm getting at is the low rent and higher rent properties may not be an apples to apples comparison,

and to get the same rent it's more likely if they are very similar.

That plus the current low rent tenants may not be able to handle a huge bump like that, so you will need new higher earning tenants.

Good Luck!

Nathan Gesner · Answer

I agree with Thomas. Determine a fair market rate and pushed the rents up to that rate immediately. I usually give the existing tenants 60 days notice so they have ample time to find a new home but beyond that, it's purely business.

I do not recommend staggered increases over any stretch of time because that just delays the inevitable. If you have a really good tenant that is willing and able to pay the higher rate, I may offer them a slight discount to stay because it saves you from a vacancy and potential loss. However, I don't recommend more than 10% below market value.

Kris L. · Answer

i like the way @Nathan G. does this.  One increase to market rate.  They can take it or leave.  Only justification I see for the gradual increase is if it is required by rent control laws.

Jeff Burdick · Answer

I think some of each...but #2 is the biggest cause IMO.  I think its usually a combination of laziness and apathy.  If the place is cash flowing for someone and they're a mom and pop landlord with other things going on in their life, its easy for people to become complacent and just let long term tenants stay for a decade without ever increasing the rent.  It happens a decent amount.

Jeff Burdick · Answer

Is it just fear of vacancies?  In my experience, vacancies are extremely expensive.  In addition to the lost revenue, you have turnover costs, marketing costs, brokerage costs.  Unless a unit is just egregiously under market value, I prefer the gradual increase.  In my experience, people generally won't move over a $25 or $50 increase.

Ray Harrell · Answer

"Market" rents and your rents may be based on very small things, such as floor plan layout, updates, other tenants (are kids always running up and down the halls making it less desirable?), windows, blocks from the train, blocks from the store, floor level, trees, facing direction, etc. People may pay $1,000 for the place across the street, but not be willing to pay $800 for YOUR place for such small reasons.

When I moved to Chicago my realtor showed me one apartment and I hated the layout and didn't give it a second thought. 2 bd/2ba. We saw a few more places, and then he showed me a different apartment in the very same building. Both units were newly gut renovated, updated amenities, same appliances, same paint scheme, same courtyard. But I chose the 2nd one for $200 more. Why? FLOOR PLAN!

Jason Hendrickson · Answer

Increase rents and don't sweat it. If they're truly below market then you'll have no trouble finding new tenants if the current ones leave. That said, I don't think I've ever seen a listing that didn't say "rents are low for the area" or "rents could be higher". Be sure your assessment of current rent is accurate and you're not relying on the sellers opinion. Also factor in the location/condition of the property. Yeah, average rents might be higher, but are those averages based on newer properties, or properties in better condition or with better amenities?

Jessica H. · Answer

How do you avoid possible vandalisms because you are increasing rent to market value and the tenant now has to find a new place to live? Would you recommend offering some money to help them find a new place?

How do you deal with pushback from increasing the rent?

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