Best practices for raising rent

[Daniel O'Donohue]

I found a duplex in a great area of Northern California that is currently for sale and being rented very low (1 unit $2,000/month and 1 unit $1,900/month. I know that area really well and know that I could be getting $3,300-$3,500 per unit.

What is the best way a buyer can raise rents to market value? Are there any CA laws that restrict me from doing so?

Thanks!

[Michele Fischer]

You should be able to research the CA tenant-landlord laws, it is very important to understand the local laws, first hand.

When we buy properties that are occupied, we normally increase rent over a period of months rather than all at once.  Give to them in writing when rent will increase how much, such as a $200/month for 3 months or whatever.  Unless you really need the money, give some grace and ease into it.  They are under stress with the sale and will need time to find a new place if they can't afford this any longer.  Assume that they won't stay, so steer them to leaving in months where you have more availability or easier months to rent, such as spring/summer.

We like to increase rent to 50% of the difference between current and market rent each year.  So in this case there is is a $1400 gap, so rent would go up $700 in year one.  In year 2 if the gap is still $700, it would go up another $350, or maybe more if rent is even higher by then.  This has one advantage of keeping you moving ever closer to market rent, making steady progress and avoiding a $1400 gap in the future.  It also helps to retain tenants, if they start shopping around and find that they can't find something comparable, since it is still below market.  It is almost always cheaper to keep an existing tenant rather than getting a new one, due to empty days, marketing/screening costs, cleaning, time invested, improvements needed, etc.

Above all, treat all tenants the same, don't show any preferential treatment.  If the units are the same they should have the same rent.  If one tenant gets an increase, both should.  Don't leave any room for a discrimination accusation.