Negotiating Rent Increases & is +$100 on $900-$1K units too much?

Question

This was the general question someone else posted (@Connie Tang), but since I ended up writing a novel with some Negotiation Points, I wanted to start a new thread.

Here it is:

Don't be afraid to approach the subject or rent increases with the tenants and ask them what they think is reasonable. Tell them or show them your market research on the current market rent rates, and staggering the rent increase over time is an option.

Get creative.

Ask them what improvements THEY would like to see you do. Ask what they don't like about their units, what do they want. Be blunt, ask them what they would be willing to pay more rent for, sometimes it may be something relatively cheap and easy to provide. Your idea for basement laundry sounds good, or just increase the rent and provide the washer/dryer included with the rent instead of coin op. Point is, don't be afraid just to talk to them. Let them know this is a business for you and you don't have to be ashamed to tell them that you are doing it, as are all business owners, to make a profit. In my experience, they all understand that. Let them know you will take care of the units, but you believe they are XYZ below market rents. Generally when you explain to them what market rent rates are, they already know (especially around lease renewal time, cause they've already looked at other places as an option or to anticipate how much you may raise rents).

Ask what they can afford, and tell them what you believe market rent is for that unit.

I had one long term 4-5 year tenant that balked at a $200/mo increase on $1900 existing lease (it had only raised $100 in that 3-4 years). I made no secret that they were getting too far below market rents. They asked "don't they get some discount for being long term good tenants who pay on time and take care of the house", to which I agreed but reminded them that was their obligation under the lease at any price, and advised them the rent wasn't being increased to full market rent of $2400 which a similar unit recently rented for. In other words, I reminded them they are still $200 below market rents and that if they chose to move out, I would miss them, but the unit would be listed at $2400 for the next occupants - so they were getting a deal and I WAS sacrificing and compromising to keep them as great tenants.
I also let them know/reminded them that CA keeps seeking to expand rent control laws, which means I HAVE to increase the rent, otherwise if/when they do move out I won't even be able to raise the rent to "market rent" even after they move out. Which is another reason RENT CONTROL does NOT protect tenants, especially long-term tenants. In the end, I was honest and direct with them and they agreed to the $200 increase for year one and an additional $100 increase for an optional 2nd year.
That was another negotiation point I had with them. I offered them a 1 year extension with the $200 increase, or a 2 year extension with a $200 1st year increase plus a $100 2nd year increase. They could see the writing on the wall with CA rent rates and they happily chose the 2 year extension. As such, in 1+ year from the start of their extension, they will be paying $300/mo more than they were before, which brings them much more in line with true market rents, but still lower (discount) from what they may pay elsewhere for a comparable (nice, modern unit; house was rebuilt in 2016), and they get price protection in year 2 from what could be an even larger rent increase if the market stays hot (which it has; this was in Feb and the rents are already much higher in CA since then).
I am also very honest and direct with them and I tell them as they get farther and farther behind market rent with the rate they are paying when I do have to raise it a bunch, like say $200/mo to stay at least within eyesight of market rent, I acknowledge that they likely experience "sticker shock" and their first inclination is to say "hell no"/decline it, and want to move out. Again, acknowledge their normal human reaction, and explain your justification for the increase: likely comparable market rates, and a discount off that for their positive performance to date. Reassure them you want them to stay as great long-term tenants but don't be ashamed to show them some comps where they would be paying more if they move out. This also means you have to know your market.

Get creative.

Nothing says rent increases can only be once per year. Do a 12 month lease, but in the terms raise the rent $50 now and $50 in 6 months. Explain to them that it is only an average increase of $75/mo over the next year to them (but for you it's $100 more starting in 6mo; $50 now, additional $50 in 6mo). This tactic also helps take the sting out of the sticker shock. It's only a $300 discount for you over the 1st 6 months which is likely far less than you would spend on move-out cleaning/reno and lease-up costs. Then at the end of 12 months, you can raise it again if justified, under a new extension. ** Another way to look at splitting up the rent increases 6 months apart is: would you give a prospective new tenant a one-time $300 signing/move-in bonus of some sort, if they agreed to the $100 increased rent rate? If so, this is no different - You get the rent rate you desire from 6 months forward (assuming they are quality/performing tenants, etc).

Again, find out what they can afford, what they think is reasonable. Assuming you would like to keep them as tenants, recognize it is a negotiation. You want to limit vacancy periods and maximize rent rates/income and limit expenses = (profit). What do they want? Ask open ended questions and listen to what they would enjoy more about the unit if you provided XYZ. The key is to try to get their buy-in to the rent increase so they feel they contributed to the decision and the end result of how much they are paying, and not just that the increase was thrust upon them. If they simply can't pay what you expect in rent, maybe it is time for them to go. Or, maybe they will have a valid point or two to make, and you may realize your expectations need to be adjusted as well, or you may be able to satisfy their valid points with some upgrades worthy of the rent you are desiring.

I once had a new lease starting (moving from out of the area for a job transfer, sight unseen). The carpet was only about 1.5 years old, great condition and cleaned up to look new, and I told them all of that. But, I also knew that I wanted to start replacing carpet in all my units with wood/vinyl/laminate flooring (no more expense of frequent professional cleanings). We were in process of negotiating the final lease terms, length of lease, etc. I simply asked the new applicants if they desired laminate flooring and offered to install it for them. I had about 1-2 weeks before they were going to move in anyways, and that was enough time to have it installed. I asked if they would prefer that, and if so, I would expect to raise the rent to cover some of the expense. The rent was originally going to be $2000, as advertised. They asked how much, and I threw out a HIGH number off the top of my head and said, how about $200/mo in increased rent. They liked the idea. It was a 2 year lease, which means they paid $2400/year for 2 years = $4800 total. In other words, they paid for the ENTIRE flooring upgrade in 2 years. The worst they could have said was no, they didn't like the idea and we were back to normal, carpet for them and $2K/mo for me, same as it was going to be before I simply talked to them and discovered what they desired and valued and how much it was worth to them to have much nicer wood/laminate flooring.

Point is - just be straight up with them and you'd be amazed at how much people respond to your including them in decisions that obviously affect them. That specific scenario wouldn't necessarily work at the $1k/mo/unit range, but the life expectancy of laminate is more than 4 years, so you could possibly do similar and expect $100/mo more over 4 years, again 100% return on your investment and the property value is improved, and the future rent rates are increased as well, AND you have tax advantages/depreciation of the expense. Even $50/mo over 8 years would cover your cost on that scenario. Just food for thought.

Also, take pride in your rentals, take care of them, and don't be ashamed of your asking prices for rent, assuming they are justified. Just as quality tradesmen often don't haggle on the price of their labor, because it's a reflection of their time's worth, you should value your assets/rentals and what they are worth (but also be realistic). I typically take very good care/maintenance of my units and do upgrades over time so they are not horribly dated as are many other rental properties. I get complements for them during showings vs other places the applicants have seen, and as such, they are generally willing to pay extra for it and don't generally balk or want to negotiate on the rent rates.

Kind of long, but hope this gives you some ideas.

Others, please share your negotiation tips, advice, and success stories as well.

thanks!

Andrew - maskless :0

Nathan Gesner · Answer

@Andrew Croley You accuse me of being a bad property manager, but then say it's the property managers responsibility to get max rent??? Your post is only questioning a small amount, but I see posts all the time where Tenants are hundreds of dollars below market. That's the scenario I'm addressing.Let's crunch the numbers:Scenario is that rent is $1,000 a month and should be $1,400 a month (I've been on this board for over ten years and see this scenario a lot). You mentioned an incremental increase every six months, so let's see how that plays out. You notify the tenant their rent is increasing $100 in September and then $100 every six months until they reach $1,400.The first six months you are $300 below marketThe second six months you are $200 below marketThe third six months you are $100 below market Your plan just cost you $3,600 in lost income compared to my plan with an immediate increase to market rent. That's about a 30% loss of income and that doesn't account for any market increases during that 18-month period. In the last 18 months, my market rates have increased about 20%.Can most tenants afford more? Not in my experience of 11 years with 400 rentals. Most renters are paying 1/3 of their income on rent, have little/no savings, and live paycheck-to-paycheck. HUD says over 10% of renters pay over 50% on rent.I'm not saying my way is the only way. I'm just saying it's the right way. :)Your mileage may vary, so do what seems right to you.

Corby Goade · Answer

I don't understand why people feel the need to negotiate rent increases. The rent is what it is- if the tenant is willing and able to pay it, they will. If not, they will need to find another place and you can find someone who is willing. If no one is willing, you are asking too much.Don't get me wrong- I respect and appreciate my tenants and I maintain my units property, take care of maintenance quickly, etc. I just don't involve tenants in my business decisions- it doesn't really matter to me what they think my profit margins should be. Fair market rent is fair by definition, but I can guarantee most tenants would beg to differ. McDonalds doesn't ask their customers if it's okay if they bump up the price of a burger. Either the cost of labor or supplies goes up and they act accordingly- the market will bear what it will bear.

Bob Okenwa · Answer

@Jon SchwartzAh, I missed that part. Yeah, that changes everything. It's an unfortunate reality of the Golden State.If it makes you feel any better, I live in AZ and invest in OH so I don't have to worry about that :-)

Nathan Gesner · Answer

@Andrew Croley that is a novel, and I don't have time to read it. But I did have time to read the first few lines and have to point out an area I disagree with you.Incremental increases may sound like a good idea, but I believe they are more likely to cause problems. First, you or your tenant are more likely to get confused by the schedule and forget an increase, creating additional work or frustration to get it corrected. Second, I believe the on-going increases are just as likely to make the tenant mad. Third, the tenant may discover they can't afford the increase and still get behind on rent or have to terminate early.If your house rents for $1,500 and is worth $2,000, then the best practice is to remove the current tenant and find a new tenant that can afford (and appreciate) the rental for market rate.

Andrew Croley · Answer

@Nathan G. Also, I'm not against some of the points you are making. When I talked about property management, their duty is to provide maximum return to the investor, I was complaining about how the investor got into the exact type of scenario you detailed. Why was the rent only $1000 in a $1400 market? Likely due to the management NOT setting rent comparable to the market in the first place, and then likely NOT increasing rent along the way. Like you, referencing posts you see all the time where they are 40% under market rents, my point about bad management was that the rent rates should never get 40% under market. Instead, they should be increasing rents, and if an incremental process helps (by avoiding turnover) be open to it. The alternative is costly turnovers/vacancies/management lease-up fees, etc. Incremental rent increases are just ONE Idea and again was proffered as a creative way since I think most managers and investors seem to think the only time to raise rents is every 12 months at an annual lease renewal period. Your same scenario, could also be explored another way. Explain to tenant how under market their rent rate is, show them they essentially have NO other options in the advertised market spaces (online comparable market listings) for a comparable property at a lower rate, Increase their rent by $200 or $300 up front and have the remaining $50-$100 increases after each 6 month period. Again, your scenario was just ONE option of implementing incremental rent increases, not THE only option. Another scenario similar to what you detailed, but with a larger raise up front: IF you raised $200 up front, then $100 after 6 months, and $100 6 months after that, you cut the difference down to $1800, which is probably RIGHT IN LINE with what it would cost you in cleaning/maintenance and coughing 1st month rent over to property management's lease-up fee. So, why not save all the hassle and just offer the discount to the tenant, keep them happy and performing and cut out all the extra work and risk of a new tenant you don't have a track history with. Hypothetical $1000/mo rent current (Nov/Dec 2021 hypothetical), market $1400, raise to market rent w/in one year: Jan 2022 increase rent $200/mo = $1200 rent = $200/mo discount off market rent * 6 mo = $1200 discountJuly 2022 increase rent $100/mo = $1300 rent = $100/mo discount off market rent * 6mo = $600 discount (subtotal $1800)Jan 2023 increase rent $100/mo = $1400 rent = market rent = Total discount to keep good performing tenant: $1800 total. Within one year you are at market rent. If you think it will be higher in one year, build in another $50 or $100 increase and make the lease extension for 18 or 24 months. Or just keep 12 months and revisit the market rent rates in a year. Another point you can make much better in a personal conversation with the tenants in addressing "sticker shock" at rent increases is how they view the increase. If you have not raised the rents in a couple years, point out they should view that as a savings they already received and that the rents should have been raised in the past, so the steeper the increase now, the more "savings" they realized over the past XYZ time period that they were in fact paying under market rents. That technique also helps smooth over the rent increases when they are below market rents for a while and you have to play catchup. Hard to deliver that message in a form letter vs having dialogue with them. The ultimate point is to be open to creativity in structuring deals and consider open dialogue, with the goal of retaining your good tenants.

Andrew Croley · Answer

I'm advocating that you can choose to negotiate for higher rents. Of course, if you are hundreds of dollars below market rents, you have to catch up somehow. If you know they can not afford the higher rent, then yes, you would have to either accept lower rent and keep your tenants or give them a firm rent demand/increase and likely watch them go, at which point, yes you would seek market rent. However, I think my main points about negotiations are being overlooked. I'm advocating to seek the highest possible rent you can for your units by 1) taking care of them, updated/modern, well maintained, etc. and 2) don't be afraid to negotiate with your good tenants to increase rents and not have to kick them out and start the landlord/tenant relationship all over again with other tenants just to attain such market rent. If you have good tenants who pay on time and you want to kick them out to seek market rents because you have NOT incrementally increased rents to keep within reach of market rents, then you are gambling with the next tenant and their true ability to pay rent. I'm saying I don't want to throw away the relationship with otherwise good tenants who take care of the property, pay on time, etc. I'm advocating to keep raising your rents and use effective communications / negotiations with them to keep them happy and not sour that you're raising the rent. @Nathan G. I'm not accusing you of being a bad property manager, but I am saying the property manager's role is to get the maximum return for the investor. In your scenario your current rent is 40% below market rent $1000 vs $1400/mo. Why is it so low in the first place? Likely due to bad property management that was not doing rent rate increases when they should be, or because they started the incremental raises too late in the process. I am saying negotiate along the way and keep within reach of market rents as the years go by, not wait until your are 40% below market to start raising rent. And, if you do as I suggested and negotiate with the tenants, involve them in the process, use incremental increases, if/when you DO need to increase by a large amount (dollar or percentage), communicate honestly and effectively with them to help them understand why you need to increase the rent. In doing so you will likely salvage the tenant thereby reducing vacancy/turnover costs. Others advocated to just send them a non-renewal or just a letter with a rent increase demand and if they move out so be it. That is cold and no one would be expected to respond positively to being "managed" that way. However, if on the other hand you have good relationships with your tenants and aren't afraid to have a conversation with them about market rents and the increases necessary, in my experience tenants respond well to that. People can handle the truth if you just help them understand it. Another point I made was that if it is a significant increase in rent and you think they may not be able to afford it, the property manager SHOULD be re-qualifying them, not just blindly sending them a renewal offer at much higher rent. This posting started as a response to someone questioning whether they should increase rent by $100 on a $900-$1000 property. I advocate yes, but rather than just send them a cold demand letter, have a conversation with them and if needed, don't be afraid to NEGOTIATE to keep an otherwise good tenant. That is where my incremental proposal came from. In the scenario I GAVE, rather than $100 increase from day one, IF you think they may decline that and move out, you could offer $50 now and $50 later, which means you are only accepting $300 less over the first 6 months, which is likely LESS than it would cost you in cleaning and repairs, marketing, time and energy to screen new tenants, just to HOPE they were as good as the last ones. So, I stand by the points I am making that investors and property managers should Think Outside the Box, Be Creative, and be Open to Negotiations when they need to increase rents. I know I would forfeit $300 to keep good tenants another year versus all the work to lease up a unit all over again. And for those paying property mangers 10% and 1/2 to 1 full month's rent for each "lease up" and turn over, it's definitely a bargain to forgo $300 vs having turnover and losing 1/2 to 1 month's rent (4.1% to 8.3% of the annual GROSS Rent on top of the management fees they already may pay). I'm not advocating for an always do XYZ solution, I'm advocating for dialogue and open communication with your tenants. I'm sure they would appreciate it, as I would if I was the customer. Now, if you are running an entire apartment complex with hundreds of units, of course your policies and practices have to be more rigid so it doesn't appear that you are playing favorites or discriminating with different rent rates for essentially the same units. That's not what I'm talking about. I hope this clarifies some of my points.

Scott M. · Answer

There is simply no right answer to this. What you suggested works in some cases. Doing the exact opposite works in other cases.My .02 is it is best to be open to individual circumstances and decide on a case by case basis what is right for all parties.

Tim Miller · Answer

Like others, I have to disagree. I love my tenants but I'm not asking them anything that has to do with my business or the business decision to raise rent. We will not increase rent over $100 and that has to do with keeping rents in line from the start. We provide a 60 day notice prior to end of the lease that the rent is increasing. We give them 15 days to accept or reject it, either way we're off to the races.

Andrew Croley · Answer

@Theresa Harris Yes that is the problem with rent control. It forces the landlord to HAVE TO increase rent rates every year to stay within reach of true market rents. If they don't, even between tenants, they can't increase the rent to full market rent for the next tenant. In CA that's generally limited to 10% (plus actual cost increases; not all units apply with this restriction, and other carve outs), but as CA pushes for more and more rent control, Landlords are forced to raise rents for long term tenants or they will be stuck with undervalued rent rates even when that great long term tenant does decide to move out/die, whatever. I know someone who was renting out a place for $800/mo and the market rent is more like $1500. If they were under CA's rent control if/when that great tenant moves out or dies the most they could raise the rent for the next tenant is $80 increase to $880 and it would take them YEARS to ever catch up to actual market rent. As a result, for landlords to avoid that trap, the CA RENT CONTROL system essentially forces them to increase the rent for great long term tenants and always keep their rent rates within 10% of market rents. In this example that tenant has been in the unit 30 years and takes care of all the maintenance (a separate issue whether that's a good idea or not), but the point is when that tenant is gone, IF that unit falls under CA's RENT CONTROL then the owner will be loosing out on as much as $620/mo due to their generosity with the former tenant. So the lesson for those WITH RENT CONTROL is always raise the rent when you can, as much as you can. Seems like that's the opposite goal of why jurisdictions want to enact rent control in the first place. Leave the "free" markets alone and let the market decide what is a fair price for a given commodity, yes including rental housing.

Andrew Croley · Answer

@Nathan G. Your negative take on the incremental increases is not well founded, but founded on bad assumptions that 1) Tenants are always paying the max that they can afford (certainly not always true), 2) that it's difficult to keep track of a rent increase once in 6 months (set a reminder in your phone or email and send the tenant a reminder of the increase just before the rent is due - not difficult), 3) you didn't read my whole posting where I specifically talk about including them in the conversation/negotiation and asking and determining what they can afford. Your assumptions are an example of BAD property management, to NOT raise rents just on the assumption that they won't be able to afford it. That's just lazy/bad property management, at the detriment to the investor's profit margin, when you have an opportunity to Keep good tenants by involving them in the discussion and plan, and being straight forward with them. Ultimately it's always going to be the Tenants decision to stay or go, but if you are charging within Market Rent rates, they really have NO incentive to leave your property that is otherwise well managed, unless they want to downsize or find a different type of unit (not comparable) that rents for less. If they want a comparable unit, they would be paying the same or more market rents at a new place. Have open discussions with your tenants and don't be afraid to involve them in the process with open dialogue - a give and take, not just let them take from you in the form of underperforming rent rates. I see soooo many "professional" property managers listing properties for WAY under the true market rent rates just because they want to make THEIR job easier with lots of applicants vying for the same undervalued property (low rent rate), which is done purely to make the manager's job easy (lots of qualified applicants seeking the discounted rent rate), but this is done purely at the detriment of the owner/investor's profit margins. The property manager's primary job is to maximize their owner/investor's returns, which of course includes proper maintenance to the physical structures as well as a positive landlord/tenant relationship, including contract negotiations. If your manager can't negotiate a renewal without pissing off the tenants, you have the wrong property manager.