Increasing rent on a significantly underpriced rental

[Josh B. James]

We have a rental that is currently under a month-to-month lease. The current tenant has been paying $825/ mo, on time, for the past 3 years, but market research suggests we should be charging $1600 - $1700/ mo. The tenants are capable of renting at that price range but are obviously accustomed to the $825 rate they have had for the past 3 years. 

I've read up on offering 3 rent tiers in a rent increase notice, which I would like to incorporate, but how much should I raise rent and what should the timeline be to get the rent up to market rates? I'd like to get it to market rates as quickly as possible without spooking the current tenants. I image a 3-year timeline:

Yr 1 - $1,000/ mo (1 year lease), or $1,100/ mo (6mo lease) and $1,200 (month to month). 

Yr 2 - $1,200/ mo (1 year lease), or $1,300/ mo (6mo lease) and $1,400 (month to month).

Yr 3 - $1,400/ mo (1 year lease), or $1,500/ mo (6mo lease) and $1,600 (month to month).

Has anyone else dealt with this, or have any strategies to reduce sticker-shock/ timeline to reach the market rate?

[Patricia Steiner]

You're running a business.  The tenant has enjoyed paying below market rent for years now but all good and underpaid things must come to an end.  To tier the rent doesn't make the situation go away. Actually it ensures that you remain below market rent indefinitely while the tenant gets the joy of having the rent increasing every six months or so.  It's time to do what's right for your business.  Let the tenant know that you've enjoyed having him there, you hope he will stay, but you will be raising the rent to the market rate effective in 30 days.  

If the tenant really can afford the increased rent, he will appreciate that you held off raising the rent as long as you could and you may retain him.  If he's just not willing to pay more - which is usually the case - he may get a big dose of reality with his search for a new place and stay.

Just be sure to set your rent to comparable properties so if he leaves, you can attract a new tenant quickly.

Best...