Need to Raise Rent, But How?

Question

So I'm struggling and hopefully I can get some help....

Here is my situation - I closed on a tenant occupied SFH back in April in an up and coming part of town - no tenant contract in place. I was initially concerned about the tenant while running the numbers, but after an open discussion with the tenant and now having received both months rent early I think we can keep a good relationship going. The house is a sturdy 2b/1ba that is renting for $550/month - if I put $5K put into the property I'm confident and the numbers prove I could be getting $300+ more dollars a month. My goal has been to increase the rents to $825 from the begging so I can increase my cash flow and in 6 months get a higher ARV to BRRR into my next deal.

But, I've got to find a way to increase the rents.

Unfortunately, I don't believe the tenant could afford a rent raise - their only means of income is disability. Last week the county the property resides in extended their no eviction policy for another 3-4 months from what I have heard, if not longer. Evicting this tenant was never the direction I wanted to go, nor do I plan too. So with that in mind, I know I'm going to have to get creative on how I'd go about increasing rent and I understand this will involve me getting creative and working with the tenant.

So I ask myself, what are my options? Can a person on disability also apply for housing assistance or is this built into disability? The tenant has stated her only income is disability.

I believe these forums are super helpful, because I continue to learn so much on this platform - not to long ago I read deep into a forum on BP about some creative structuring to tenant contracts that have the landlords best interests in mind as well as respecting the tenant and producing an outcome where both sides feel as though they got a win. So here is what my mind pulled from the forum and how I processed it after I read it.

Bare with me - If you've read this far you can tell writing isn't my forte.

Possible ways to structure new tenant contract to raise rents:

• Require a contract to be signed and 30 day notice that rents will be increasing to $825 which is 1.5x current rent and max increase allowed by the state of NC - I believe. Simple, yet not such a passive approach. 
• 
• Establish a contract stating rents will be gradually increasing $50/month until the monthly rent has reached the amount of $825/month. This could warm the tenant up to increase in a less aggressive way. 
• Establish a contract where the tenant's rent due each month is $825. However, build discounts into the contract for a 6 month time period that would allow the tenant's rent to stay the same if all the requirements are met. For example - pay before the 3rd of every month - $100 discount, keep the yard and inside clean - $100 discount, be accessible for handyman to be able to come and do work - $75 discount. Whatever a practical discount would be that could be applied - just get creative. 
• The 6 month time period of discounts can be used for the tenants to apply for housing assistance or look for other means of revenue to begin off-loading the rent due each much after the discounts expire. If housing assistance is received - this could perhaps even get the tenants responsibility for the rent due each month lower than the $550 prior to the contract being established. 
• The 6 month time period of discounts can be used for the tenants to apply for housing assistance or look for other means of revenue to begin off-loading the rent due each much after the discounts expire. If housing assistance is received - this could perhaps even get the tenants responsibility for the rent due each month lower than the $550 prior to the contract being established.

• The 6 month time period of discounts can be used for the tenants to apply for housing assistance or look for other means of revenue to begin off-loading the rent due each much after the discounts expire. If housing assistance is received - this could perhaps even get the tenants responsibility for the rent due each month lower than the $550 prior to the contract being established.

I'm not overly stressed here, but know that this deal has equity that can be made and used to fund my next deal. So I've got to make something happen and following the eviction route is not something I'm interested in. I'm sensitive to the tenant, especially in these times - but also know that I have my own family to provide for.

I loved this deal when I landed it - tenant or vacant. I still know that this can be a home run - I just need to approach these next couple months the right way. I'm breaking even on the deal as I sit on it today and it is in an appreciating area - so my stress level is low.

I'm playing out scenarios everyday in my head on the best way to approach this. I'll keep you posted on how it plays out!

JF

Account Closed · Answer

You should not own property with a business model that relies on the financial situation of your single tenant. You are not supposed to analyze your current tenant's financial condition. You should not have a business model where your real estate investment will go down the tube (whatever that means) because your tenant moves. In fact, my philosophy is exactly the opposite of that you are asking because every time a tenant moves I love it because I increase the rents all at one time far more that you want to spend several years and raise the rents a little every year.

Every investment calculation and decision needs to be spread over 10 years. Do you make more money raising the rent $30 to $50 every year, or do you make a lot more money giving your tenant the boot and increase the rent $300 for the new tenant.

Don't get personal with your tenant. This is exactly what I tell my tenant when I want to raise the rent $200. "Sorry, but business is business". If you raise the rent to $850 and he moves because he can't afford the increase, then all the better for you.

I',m sure you heard the saying, "nice guys lose".

There is also a book titles something like, "Why Nice Guys Lose and S.O.B.'s (sons of bitches) Win" I prefer to be the latter vs. giving away tens of thousands of dollars to a tenant. Especially, since most tenants don't understand enough about real estate investing to appreciate your not increasing their rent all at one time.

Anna Sagatelova · Answer

While I don't think you need to be an "SOB", I am confused that you first were concerned about the numbers with the current tenant, then spoke with him extensively, decided to keep things as is, and now want to increase to market/ARV rent. Of course nothing wrong with wanting market rent, but was rent increase part of that "open conversation" with the tenant, or was it just information gathering on your part about him?

At the end of the day, just be decent about it to your tenant, who probably just let out a sigh of relief that you were going to keep him in place and honor his rent. Give him ample notice and let the tenant decide if he will try to qualify for the increased rent to stay, or if he needs to find a new place to live. The decent thing to do is to give plenty of notice.

Kenneth Garrett · Answer

@Josh Farmer

You had indicated if you put in $5,000 you could raise the rent $300.  Before you try to raise the rent are you going to move forward on the rehab.  I don’t think there is an advantage to raising rent to a tenant who can’t afford it.  You are better off giving them a 30 day notice, conduct the rehab and find a new tenant.  Yes they could refuse and in spite not pay rent until the eviction moratorium has been lifted.

I am currently in the process of issuing a 30 day notice, conduct a rehab, put a new tenant in there and refinance the property. Rent will go up close to $300 more.  I am also under an eviction moratorium until July 31, but I expect it to be extended. Execute your plan.  Nothing wrong with running your business as a business, but you can still treat people with respect.

Anthony Wick · Answer

@Josh Farmer

I honestly didn’t read your entire post.

Give notice. Raise the rent. That’s how you raise rents. I’m being serious. If you cannot do that due to some sort of moral issue, hire a PM so they can raise the rents.

Wesley W. · Answer

I'm with @Anthony Wick.  However, the eviction moratorium puts a wrench in the works.  There is a non-insignificant chance if you raise rents that your informed tenant will stop paying as retaliation.  You are the person most qualified to assess what that risk actually is based on this tenant and your local laws and whether it is worth it.

Need to Raise Rent, But How?

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