Low rent from the privious owner. How much should I raise the $$?

Question

Hi! I purchased my first rental property this March, and there is an existing tenant. He has been living there for about five years, and currently, his 2-year lease is about to end in September. Since the previous owner didn't raise the rent for 2 years, his current rate($1200) is significantly lower than the market (renting around $1400 depending on rent.com and Zillow); I got the feeling that I can rent the place out for $1400, but many articles I read also advise not to raise the rent more than 8% which is $96 for me. Should I keep the raise around that range and ask for $1300 or increase more($1300-1380) to match the market? The tenant seems cool and paying rent on time so far; he said he wants to stay here. What would you do?

Nathan Gesner · Answer

Raise the rent to the market rate. Just a $100 reduction will cost you $1,200 in lost income over a one-year period. If you enjoy charity, charge the tenant full rate and then donate $1,200 to people that really need it.

I also don't believe in incremental increases. Either the renter can afford the place, or he can't. Small increases spread over time just cause confusion and increase the likelihood of problems or animosity.

It's not cruel. You're offering a product for what it's worth. This renter can either choose to purchase your product or shop somewhere else.

Scott M. · Answer

Lots of variables at play that we don't know like what city / state this unit is in. Some places have restrictions on how much rent can be raised so you want to look into that first. The one thing I would encourage you to do is be honest about the condition of the property and if it justifies the rental comps you are looking at. Homes fresh on the market may be in better condition depending on how the tenant and former landlord treated the home. To justify rent you may need to do work. Also, raising the rent may cause the tenant to leave. Just be sure you are prepared for both of those before you rock the boat. If you are fresh out of cash or don't want to invest anything or can't take the hit of a tenant turn right now, stay put. If you can, then move forward. As for how much, to me it really depends on the conditions of the unit. If same to homes on the market, and you are legally allowed and you don't care if they leave, I would raise it to market value. I would gauge where you are at and then proceed in that direction.

John Teachout · Answer

We've "inherited" quite a few tenants. ALL of them were way under market. One woman was paying the same rate for 17 years...

Anyway, we always do a small and tiered increase. ie, +$30.00 60 days from now and 6 months after that another $30 increase (these are month to month tenants). That gives them time to confirm they're getting a great deal. Most of our inherited properties were in relatively poor condition with deferred maintenance. We try to get in and do important things like water and electrical issues and then schedule cosmetic improvements for later. Due to our schedule, we try to defer turnovers but in nowaday's increasing rent rates, turnovers aren't a bad thing. If you're going to make a large increase, I'd recommend giving a longer notice (like 90 days or something) or if they're on a lease, give them a heads up that the rent will be going up by a significant amount...

Cedric Volkmer · Answer

I purchased a duplex that has a tenant who lived there for over 22 years. I will increase his rent step by step. The unit also hasn't been updated, it is very clean, but still the appliances from when he moved in (which are all working, so a great tenant). The other side is more updated and the tenant had been paying under market. Nathan's response above is great! Get them to market rate quickly and they can decide if they want to stay or find another property in their price range. When the lease is due, that is what I will do with that tenant. Great discussion and definitely learned something new again!

Esteban R. · Answer

I would have a discussion with the tenant. Tell them that they are paying well below market rent and you need to get the rent closer to market rate soon for your financials to work. See where the discussion goes.

If they can't pay any further increase, then if you are financially stable enough at this time, do not renew the lease. Get a new tenant at market rent. If you need that income and don't believe you can get a new tenant in a few months, then place the current on a month to month and increase the rent 5% every 3-6 months and be transparent that your goal is to get it to market rent.

Keep in mind also that you have the benefit of a tenant that has consistently paid the rent for 5 years. Do you have another property that may be more in their price range? You never know when this tenant may refer someone to you or may choose to rent from you again in the future, so having tact is key in addressing matters such as this. Best of luck!

Bjorn Ahlblad · Answer

Inherited tenants are a given in this business and in my experience most have been just fine. I limit rent increases to 5% on existing tenants and bring to market rent or above on new ones. So far that has worked well for me.

Lam N. · Answer

I can't tell you what to do because I don't know you, your situation, or your tenant. But I always get rid of existing tenants and get my own. This way, I know exactly who is renting from me and I can also use the opportunity to rent out at current fair market price.

Case in point. Last year, I bought a 5 apartment building. Got rid of all the tenants there. The previous landlord was charging about $400 each unit. New tenants are now paying $850 each unit. That's fair market price.

In my experience, landlords who underprice their units also tend to not do their diligence with vetting tenants. Existing tenants are almost always pain-in-the-ass tenants.

Low rent from the privious owner. How much should I raise the $$?

Low rent from the privious owner. How much should I raise the $$?

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