When to reno and up rent versus keep as-is and accept lower rent

[Alexander V.]

When you've got an occupied apartment in an area where local rents have increased quite a bit over the last few years, what are the deciding factors in whether you take the initiative to renovate it and increase the rent to the new market rate versus let it sit and accept the lower rent?

In my particular case, I have a tenant who has been in a unit for over a decade. The unit has not been updated in that time, but rents in the surrounding area have increased considerably. He is paying below market rent and probably couldn't afford market rent. My options are A) accept the stability and lesser headache that comes with taking no action for the time being in exchange for accepting his below-market rent, or B) accept a turnover from a good tenant and pay for a renovation in exchange for a significant rent increase (in the ballpark of +15% right now with a strong upward trend).

My inclination is to go with option A and renovate when the tenant chooses to leave or when the disparity between what he pays and what the market rate is gets closer to 25%. My main considerations are 1) this is a good tenant who always pays on time and never complains and 2) the increased rent at this point, though getting to be significant, would still take 4-5 years to cover the cost of renovation.

Tangentially related question: when would you pay cash to renovate versus seek a renovation loan?