Raising Rents during the Pandemic - How do I approach this?

Question

I
 recently took ownership of a new apartment building in Kansas City. All
 the tenants are on month-to-month leases and rents are about 30% under 
market. I am sensitive to the notion that we're in a pandemic and as far as I know nobody in the building is struggling from COVID-19 circumstances yet the size of the monthly loan payments is going to force my hand to bring many of the units up to market rates.

I'm concerned I'm going to 
run into resistance (some units are $300-$400 under market) and potentially tenants who decide to just stop 
paying and use the COVID moratorium as an excuse.

There
 are 12 units total. I think I'm going to leave everything alone for a 
few months and then tackle them between April, May, and June (4
 units per month). I'm hoping things might be a little better by then 
and Biden or the governor won't extend the moratorium past July 2021.

Does anyone have any thoughts?

Nathan Gesner · Answer

@Rob Bianco You have renters that qualified for the lower rate. Many of them may not qualify for market rent. Trying to work with them to keep them in place is likely to cause resentment and increases your likelihood of late rent, unpaid rent, or other problems.

Staggering increases can cause animosity between you and the tenants, or between tenants. Tenant in 2A finds out his rent is going up $400 but Tenant is staying at the current rate. That can turn ugly.

If it were me and I could afford it, I would give every renter notice of increases at the same time. If they intend to stay at the higher rate, I would require them to show proof of income that the new rate is affordable. If they don't want the increase or can't meet your qualifications, find new renters. For this kind of plan, I would consider waiting until Spring/Summer when the market is hot and demand is higher. And while you're waiting, you may have 3-4 units turnover and will have the chance to test your rates and fill some of the units at market rate so you're not risking such a heavy turnover during the increase.

Jill F. · Answer

I would wait a few months until the vaccine is available and eviction moratoriums are off. If everyone is currently paying, I don't think I'd rock the boat right now.

Taylor L. · Answer

Are you doing any level of renovation? We've continued to turn units and raise rents, but tenants are moving out, we're renovating, then putting back on the market at the new market rents.

$300-400 is a huge rent increase, I don't care where you are. You're probably looking at a different renter altogether. If you have a minimum 3x income requirement, you're increasing your tenants' minimum income by about $11,000. Do any of your current tenants qualify?

I think your best strategy is having tenants move out, renovating the units, and relisting.

Brock Thomas · Answer

@Rob Bianco congratulations on your purchase.

I think you have the right approach.  In my experience it is difficult to find many quality tenants between November and the end of February in Kansas City.  It’s cold this time of the year.

The eviction memorandum ends at the end of 2020 however we may see that extended with our local government.  Jackson county is going to be the toughest to get things done.  It’s very important to know your lease in this environment.  My attorney says they are having success with evictions from lease violations outside of non payments and with unlawful detainers.

I have raised rents during the pandemic and we leased many units this year.  The rental market is still strong in KC however we do see seasonal slow downs in the winter.  Best of luck

Filipe Pereira · Answer

I applaud your thought process here @Rob Bianco, but if congress gave us any insight as to how long landlords will be affected - it was by telling us that the landlord funds they made available are good until 9/30/22. If I were you, I would plan for the worst on that front. I agree, staggering your notices to raise rent is the way to go. Try 4 at a time, see the feedback you get and go from there. If 1/4 turns into an eviction, then I'd say you're doing OK. How much are you thinking about raising the rent? You may also consider doing multiple rounds of rent increases. For example, $100 every 6 months. In the meantime, I would try to find things to do around the property that are visual improvements. Tenants are more willing to accept a rent increase when they see improvements being done - especially on things they want. Ask around what tenants want to see done, then pick and choose the ones that make sense for you. You may win some over that way.

Mike D'Arrigo · Answer

Rob, even if they are month to month, you would have to go through an eviction process.

Alex Olson · Answer

I would advise that you have the right to charge fair market rent to your tenants. Most important is to be reasonable and courteous to your renters. An annual gradual rent increase is normal and expected by most tenants. Make sure you have a great lease contract. Hope that helps! Kc is a strong market.

Rob Bianco · Answer

@Mike D'Arrigo

Well technically couldn’t I evict on the premise of non-renewing the lease as they are month-to-month?

I’m not saying I want evict anyone but if someone refused to leave that is my understanding of the law as it is today

Mike D'Arrigo · Answer

@Rob Bianco I think your approach is sound. If you bump the rents up that much you are likely to trigger a lot of non payments. Most people can't afford that much of an increase and rather than finding another place, some may be inclined to just stop paying the rent knowing that they can't be evicted. Some rent is better than none right now.

Tracy Streich · Answer

@Rob Bianco  I like the idea of doing it in phases.   Then when you have some vacancy it does not seem overbearing.   Start with the four lowest that way if they decide to bail out or move then it does not hit as hard.  Good thing about the MTM lease right now is you don't have to evict for non payment.  You can just choose to not renew.   You might start with just raising the rent and keeping them MTM.   This keeps the ball in your court

Raising Rents during the Pandemic - How do I approach this?

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