Best way to increase rent by $300 per month & keep tenant?

Question

I'm renting a SFR well below market. The tenants have been renting for almost a year, we have a month-to-month agreement. They are great tenants and I really hope to keep them but I need to increase the rent by $300 per month which is a 10% increase. What's the best way to do this while retaining the tenant?

Adam Martin · Answer

That is a pretty hefty increase.  Keep in mind that this may be necessary for you and your budget but make sure you are checking your comps as your tenant certainly will and if they can get a better deal they are likely to leave.  Also consider if they do leave what is the length of time it will take to re-rent with a quality tenant and how much will you be out for vacancy, advertising, and turnover costs.  If you are in a hot market go for it, if they leave maybe you can get even more however if not carefully consider it.  Your problems are yours and the tenant isn't going to care that your expenses have gone up or what the market is, they will mostly be focused on how it will affect their budget.  If you are wanting to build some goodwill maybe you can offer an upgrade that will add value to the property and be something they enjoy as well like a new appliance to replace one that is worn out or update some flooring to lvp which tenants love and is better long term anyway.  I also see you are in CA, is it even legal to raise the rent that much there, if you are in a rent controlled area I would always raise to mkt or at least close so you don't fall behind.  Good luck either way, I am sure others will have some great ideas as well.

Melody R. · Answer

The tenants negotiated and we landed at a $250 increase. Even at the new rate they are getting a good deal. Thanks again everyone for your input!

Theresa Harris · Answer

Has rent in the area increased that much in under a year or did you set the price too low when they rented it?  I'd first find out if there is a cap in how much you can increase the rent.  Then if you want to pull off the band aid, you can offer to get a new washer dryer and sell your current one and explain to them that this is to cover part of the rent increase.

Joe Splitrock · Answer

@Melody Rault this comes down to fair market value. If similar properties (same condition and location) are renting for $400-500 more per month, the $300 increase will not force them to move. Just be sure that you are valuing the property right based on current condition. Ultimately if they move, rent to someone else at a higher rate.

Felicia Feliciano · Answer

If this doesnt lite a Fire under you nothing will.

Try timesing $300 time 12 months times 5 years...............lol.

Anthony Vicino · Answer

Great question, @Melody Rault.

Others have already given a great perspective on this, but here's another angle to come at the problem from.

Let's assume that if you raise rent by $300, the tenants will leave. Now, two things to consider are:

1) How much will it cost you to get a new tenant (marketing and unit turn)

2) How long will it take you to get a new tenant moved in.

Alright, so you said raising rent by $300 is only a 10% bumb, so current monthly rent is $3,000 on a single-family.

How much will it cost you to go in there and get the building rent ready (painting, cleaning, etc..) for the next tenants?

How long will it take you to do that work?

Let's assume you can do the turn in a week, get a new tenant moved in within another week, and the cost to turn is $1,000.

You'll lose around $2,000 all told (between unit turn costs and lost rent).

It'll take you about 7 months to recoup those losses at the new higher rent. Within 1 year with these new tenants you'll have pocketed $1,500 more than if you'd simply kept the old tenants at the previous rent.

But what if you were only to bump the current tenants rent by $150? By the end of the year you'd have made an additional $1,800 (without any of the headache of finding new tenants or doing a unit turn.

We're all about minimizing turn-over, even if that means not getting top dollar for rent. Just another lens to look at the problem through.

Hope that helps!

Lawrence Dy · Answer

I agree with the above recommendations. If you are confident you have a superior property and are still below market rents even after increasing, you should just go for it. I always like to add a human element to it and have a candid conversation with the tenant why you are raising their rent and how they are still getting a good deal. I know others may disagree with this approach, but I find that it can help maintain goodwill when done correctly. If they can't afford it, they'll leave and then you can raise rents to market rates. If they can afford it and stay, they'll appreciate your conversation with them. Best of luck!

Felicia Feliciano · Answer

Just raise it.  If its still a deal they will stay.

Nathan Gesner · Answer

Is this an investment or a charity? $150 below market means you are essentially gifting your renter $1,800 in one year. Why not charge them market rate and give that money to a local charity that really needs it?

I don't "ease" people into a rent increase. Either they can afford it or they can't. If you increase incrementally, it is more likely to cause problems than solutions.

Determine market rate. If there's any question as to whether they can afford it, you may want to get them out and increase on the next occupant. If they are really, really, really good tenants, then you may offer a smaller increase to incentivize them to stay while preventing turnover. There's value in a good renter, but try not to let rents get more than 5% below market.

Melody R. · Answer

@Theresa Harris, I missed your comment somehow. Rents have not increased that much in a year. It's a hard house to comp. I priced it as best I could at that time but only realized once I was in the approval process with them that it was underpriced. I then received dozens of inquiries in under one week and then two offers to pay well above what I was asking! I always thought the house was pretty special but didn't know many others would share my sentiment; the house has its quirks, albeit awesome to me. ;)

@Max T. unsure what slip cash means...

Best way to increase rent by $300 per month & keep tenant?

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