Raising rents A LOT on a 4-plex that we just purchased

[Ben S.]

We just purchased a 4-plex in the Minneapolis, MN suburbs.  The current rent is averaging about $720, but the going rental rates are somewhere between 1050 and 1350 for a 2 bed 1 bath unit.  We have purchased this property with the expectation to get rents around 1100 soon. 

Any idea's on the best method that I could use to raise the rents to this level during a statewide eviction moratorium? 

On our side, we are planning on getting a 30-year loan with a higher interest rate to help protect us if we do have trouble raising the rents.  The minimum payments with expenses should be covered almost with the current rent collection.  But our goal is to pay this off in 15 years so we will need to get 1100 in rent for each unit as quickly as possible.

[Brian Ploszay]

Normally, I say just do it.  Because of the pandemic, you might want to wait a bit.   You are headed to a cold season, where renting usually slows down.  Maybe you can do this in March.

[Adam Tafel]

The governor's order included a rent-increase cap, I believe it's 20% so it shouldn't affect your plans. Are they good tenants? If so I'd be gentle at first, the last thing you want this winter is vacancy. If they are mo/mo you could add $100 or so immediately, make sure to reference rental data and perhaps your plans to make improvements to the building in your notice. Come springtime you could put your tenants on a 2-3 year plan to get up to market, or just rip the bandaid and do it at once. $720 to $1100 is a pretty major jump, so be prepared to find new tenants. 

[Bjorn Ahlblad]

@Ben S. welcome to BP and congrats on the 4 plex. Avery accurate guage I have found is rentometer.com

Just enter the address and see what they say about the rates. My thinking lines up with what others have said. Don't give yourself winter vacancies if you can avoid them. All the best. 

[Lynnette E.]

If they are paying you might want to just accept the payment and not raise the rent until the eviction ban is over.  If you raise the rent now, they may just stop paying.  Then you get nothing.

[Theresa Harris]

Are they on leases or month to month?  I agree with the others that you might want to hold off on a large increase with the current situation.  When you do increase them, do you plan on making any improvements?

[James Feely]

@Ben Spader

Given the pandemic, I’d wait for the leases to expire. That’s a pretty serious step up and there’s a federal moratorium on rent based evictions. You could turn your $700/mo rent into $0/mo.

[Polo Vazquez]

Whatever you do don't do them all at the same time! you might end up with 4 vacant units at the same time. If you have mortgage this might complicate things for you a bit. Also, if you do one first at put it up for rent at $1500 and you struggle to find a tenant then now you know you are probably trying to get too much but you would had only commited this mistake in one of the units. 

Regards

[Michael Noto]

@Ben S. Get in there and test drive the tenants before you commit long term to them with a rent increase. A lease with increased rent doesn't do anything for you if the tenants can't pay. Once you get a feel for the tenants you will then see if you want to keep them and implement the rent increases from there. 

[Jared LaLonde]

@Ben S. One at a time is probably a good option. If any are month to month, you could give notice on one unit, do some updates/repairs, and list at current prices.  Once you have one listed you will have a better feel for demand and how easy it would be to fill the others. Also if you haven't, try to meet the tenants and get a feel for how they act. Do you get the feeling they are upset the building was sold and will be mad about rent increases, or maybe they know they have had cheap rent and will be ok with some increase?  Good luck 

[Ben S.]

Wow these are all great ideas and man do I appreciate the information on this tough challenge I'm facing.  @Jared LaLonde

@Bjorn Ahlblad - I have tried out rentometer.com on this property before and that is how I came up with 1,100 because that is close to the average price for this area.  Thank you!

@Jared LaLonde - They do have Month to month leases currently.

I also left out the fact that I have been told all of the renters are very aware they are paying way under market rates.  I will actually take possession on 12/18/2020.  So I really like the suggestions above from many to talk with the current tenants and get a feel for how they will react to a rent increase.  One other thing I forgot to mention is that one of the renters is the previous owners daughter and another one is also related to the previous owners I believe.

My thoughts was to raise the rent in Feburary to $950, with a notice that the rent to will go to $1,100 in April.  That way they will have some time to plan for the increase if they do need to find other places to move to.

In the research that I've done this city does not have any 2 bedroom units available for rent and all of the surrounding cities rents start at $1,200 typically for a 2 bed unit.

[Calvin Ozanick]

If the units justify those rents, I would lean to the side of raising them. Tenants know when they are getting a discount and they are most likely expecting raised rent for this property with new ownership. Worst case scenario, the tenants move out and you can offer the rents discounted for a winter move in. I rarely would recommend holding out on the rent raises. 

[James Hamling]

@Ben S. the answer to all your problems are found in 3 simple words: ALWAYS BE SELLING!

During covid I have gotten tenants to move out, pay thousands in back owed rents, raise rents and all kinds of other things that a person "can't" do during covid simply because I "sold" them. 

Covid moratoriums has put an emphasis on "selling" yet for some reason it seems 98% miss this point. 

My go to on situations like yours is first I pick my "villain", who's fault is it for my raising of the rents? A solid go-to for me on this is tax's, that's one people connect with and we all enjoy throwing under the bus, reversing back over, forward again, back again, forward, back, forward, back.... well you get the picture. It's a point where unity can be made, comradery. I frame things to tenants as an inclusive thing, that we are business partners engaged in a venture to provide them housing, win-win. When you can conversate with a tenant on that level, it can be a beautiful thing. 

So I'd start there, justify the increases, build the conversation to build a co-centric relation, pick villain's to justify the "required" increase in response to it. Then always close on future positive potentials and tenant involvement, if there is some desired future works detail those, how these "improvements" are desired/ planned. 

As a landlord you have a choice of what relationship your going to build with tenants, a us vs them, or inclusive. 

It all boils down to ALWAYS BE SELLING....

[Ben S.]

@James Hamling Seriously those are some wise words! They really make sense and I will definitely try build that relationship with them right away.

[Account Closed]

Can you afford to just kick them all out, do your improvements and then list it for rent?  If so, I highly recommend doing this.  I realize you can't do this immediately, but...

In my experience, when you raise the rent significantly on a tenant, even after they look at their options if they decide to move, they will start seeing all the things wrong with the property.  They will start complaining about this and that, and expect you do upgrade everything and just be a drag to work with and give you a lot of work.

Whereas, if you fix the place up a bit - not saying you have to do major stuff - just even paint and clean and make it smell good and clean and freshly painted - and then you advertise it - you will then get tenants who are happy with it the way it is and with the price.  It's a whole new world entirely when you do this.

You could always tell them you will need their unit vacated in order to do the renovations, but they're welcome to apply to move into one of the newly upgraded units, including credit check and vetting, etc.

I'm sure we all know why the place was sold - it was the easiest way to stop dealing with the relatives.  

Congrats on your 4-plex.

[Sean McCluskey]

@Ben Spader are the tenants all on month to month leases? If they’re not, you’ll need to wait until their leases are up for renewal in order to ask for a higher rent.

And if the other commenter is correct, you might be capped at an increase to $860, +20% from current rents.

[Nathan Gesner]

I usually recommend you wait a few months to see how the renters perform with you as the Landlord. Determine if any of them are even worth keeping, if they could afford a higher rate, etc.

When you're ready, hit them with the bad news and move forward. No stepped increases. No negotiations. You tell them what the rate will be and they can accept it or move on.

[Lynnette E.]

Since you know you have relatives in the units, you really should just wait 2 months to see if they actually do pay, and if so on time and without hassle.  If they do not pay you should not have a new lease, just dump them.

Also, with it being relatives, make sure that at closing you get a signed statement from each tenant on the amount of deposit the old landlord is holding and make sure that money is passed on to you at closing.  Its important that you get the tenant to sign the statement and that you get something showing the original condition of the unit.

[Ben S.]

@Adam Tafel I have searched everywhere and I'm not finding any covid or non-covid rule that says rent can only be increased by 20% so this will not factor into my decisions.  The current tenants know they are paying way under current rates. 

@Account Closed I like the idea of kicking them all out and getting new ones but it's winter and a huge hassle for the tenants and me.

@Lynnette E. Thank you for the advice about the security deposit and the original condition of the unit! Very helpful advice!

I'm getting the past rents received for the last 2 years from the current owner so that should tell me how well they have been paying so I will know that upfront.

I am still debating on stepping up the rent because I agree it's best just to set the rent and stick with it, but this is such a large increase for them and it's right in the dead of winter.  So I feel that it's only fair to give them a chance to move out in the spring and raise the rents at that time to reasonable rates.

@Lynnette E.

[Adam Tafel]

It's referenced in an executive order from March, "Combatting Price Gouging During the COVID-19 Peacetime Emergency". It's possible that this order is no longer law, but we were taking it into consideration this summer. 

[Christopher M weger]

@Ben S. I highly suggest you take a look at rentometer.com. Might be useful in this situation!

[Ben S.]

@Adam Tafel Thank you for the additional information.  You are right it is still in place.  It does have some wording around exceptions if the disparity is substantial enough and out of the person's control which may be applicable in this case.  But definitely very good to know about this.

[Noah Chappell]

@Ben S. I am in the midst of an identical situation with my 4 plex, that I picked up in January 2020. 2 2br/1ba and 2 3br/1ba units. Each needed a total cosmetic rehab. All rented 2-3 hundred below market. All month by month. My approach was to end 1 lease at a time, rehab then slowly put in new tenants. Didn't work given that when other tenants caught wind of the changes everyone left, with one hanger on riding out covid to not pay rent. 

All in all, my advice is wait out covid and don't rock the boat during this time. Take control of the property, and sit on things breaking even until things shift more in your favor. Last thing you want is 4 tenants who are angry, realize they can simply stop paying, and occupy your property for free while you pay their rent and utilities. 

After you have more recourse, and if you can afford it, I'd end 2 leases at once, attack those units, then repeat with the other 2. You might face the whole building being empty at once, but that's ok. In the end you'll have a repositioned building with a new culture. Better to rip the bandaid off than to prolong the pain in my opinion. 

[Ben S.]

Originally posted by @Noah Chappell:

@Ben S. I am in the midst of an identical situation with my 4 plex, that I picked up in January 2020. 2 2br/1ba and 2 3br/1ba units. Each needed a total cosmetic rehab. All rented 2-3 hundred below market. All month by month. My approach was to end 1 lease at a time, rehab then slowly put in new tenants. Didn't work given that when other tenants caught wind of the changes everyone left, with one hanger on riding out covid to not pay rent. 

All in all, my advice is wait out covid and don't rock the boat during this time. Take control of the property, and sit on things breaking even until things shift more in your favor. Last thing you want is 4 tenants who are angry, realize they can simply stop paying, and occupy your property for free while you pay their rent and utilities. 

After you have more recourse, and if you can afford it, I'd end 2 leases at once, attack those units, then repeat with the other 2. You might face the whole building being empty at once, but that's ok. In the end you'll have a repositioned building with a new culture. Better to rip the bandaid off than to prolong the pain in my opinion. 

Wow this definitely has me thinking twice about making any changes to the rents... While I know if any of them leave they will not find any deals even close to this anywhere close to this city.  Personally I'm happy with them all leaving, I just fear that they will stay and choose not to pay...

I only have one unit that I need to make renovations to.. The owners suite they took out the wall between the bedrooms to make one big bedroom. I need to make it into a 2 bedroom unit again to get 400+ more in rent a month.

[Timothy Hero]

Wait until the cold weather is gone. Then raise rents to $900. Don't jump straight to $1,100. Then the following year, aim for $1,100. During a pandemic, you don't want to raise rents by $400/month.