Closed on a 4plex, what would you do to get the rents to market?

Question

Hello BP!

I just closed on my first 4plex in West Sacramento this week, which is fully occupied, but every unit is renting for way below market (~$250-$350 less).  This is the breakdown:

• 3 tenants on month to month leases, one is on Section 8
• 1 tenant has a lease until the end of July and is on Section 8

After consulting with a couple of people and doing some research, it sounds like anything over a 10% raise in rent will require 60 day notice (all of these units fall into that category).  For Section 8, they require rent raise approval and there is a 60 day period for that as well.

These are the options I'm currently exploring:

• Do the proper notice on the 3 month to month units asap, bump the 4th unit to market at the end of the lease term.  There is a risk of the 3 units turning over at the same time and also losing the 4th tenant.
• Stagger the increases, starting asap, so I only risk losing one tenant at a time.  This way, I would likely only lose 1 tenant at a time, max.
• Bump every unit 10% now and every year after that until the rents are at market (~2-3 years at the current market). It doesn't cashflow at the current rents, but I shouldn't be out more than $100-$200/month in the first year.

If this were your property how would you proceed? Are there other options I haven't considered?

Thanks,

Danny

Jonathan Blum · Answer

This probably isn't as popular with the forum, but when I take over new properties and want to raise the rents, I'll go to the established tenants with some listings that clearly demonstrate market rates and ask them what they think is fair.  You'd be surprised how much good will it will buy you.  It makes you seem like less of a business person ("I want the highest return possible") and more of a market follower ("the market around here is rising and I want to make sure we keep up with the times").  When I have asked tenants what they feel is fair, they often suggest what I was going to raise it to anyway, and they have NEVER said, "if you raise our rent, we'll move out".  It builds faith and trust.

There is a HUGE disconnect between tenants and landlords in many cases, and this disconnect makes tenants feel like they are being commodified, rather than treated fairly.  Engaging them in the discussion, rather than sweeping through and dropping bad-news rental increase letters in their mailboxes makes you more human, and shows them respect.  Give it a try.

Kevin Moules · Answer

@Daniel Zapata, first off congrats!! I myself just closed on my first deal which is a 4 plex in Fresno. I am basically in the same boat as yourself. 3 are section 8. 3 of the 4 are below market as well. My approach is going to be our Option 2. I plan on bumping 2 of the places within the next 3 months and see what happens. Rents have not changed for these folks for at least 5 years and one of them for 10 years! So rent increase is to be expected.

Once the rents are increased and being paid for several months I plan on raising the rent on the last unit as well. As my property manager mentioned the worst thing about rent increase is tenant turn over. You should tread lightly because if you do option 1 and even 2 of your tenants move out you may have to spend 5K plus on each unit bringing it up to speed in order to get the current market rents.

Of course your safest bet is Option 3, slow and steady! Sacramento is hot, i was looking there for a while myself. You might be able to fill units quickly which is a plus, but you still need the cash to turn units over.

Hope this helps you out a little. I look forward to what seasoned landlords have to say. I would also recommend the "Ultimate Guide To Raising Rents" here on BP. Just look for it on the search bar! It has some excellent points on there. Let us know how it goes!

Jonathan Blum · Answer

@Daniel Zapata - I don't think raising rents is gouging at all.  It is important to keep up with the market you live in...  what galls me though is when landlords in one market (I work in The Dalles, OR) raise rents to another market (Portland, OR, for example).  It makes tenants upset and leaves them feeling angry toward all landlords, rather than only those who are gouging their tenants.  I work very hard to keep good relationships with all of my tenants, and have a very good track record to show for those relationships, both in terms of retention, as well as avoiding evictions and tenants leaving units in bad condition.  Communication and respect are key in my business.  Best of luck with yours!

@Kevin Moules - One of the reasons I self manage is that management companies need to be prescriptive in their approaches.  They don't have the freedom managing someone else's assets to apply these kinds of values or give tenants a say in this manner.  It also creates more work to have a dialogue, rather than just make a declaration.  Nonetheless, it is worth it to me to build these relationships and I have seen it work well over the past 10 years or so.

Kevin Moules · Answer

@Jonathan Blum, I like your idea as well. That makes them feel like they have a say in it and ends up what you were looking for in the first place. Awesome strategy! If I lived closer and was self managing I think I would employ this technique as well. thanks for sharing.

Daniel Zapata · Answer

@Darius Howard you are correct, these are all long term tenants, though there are already washer/dryers for each unit.

@Jonathan Blum thanks for your thoughtful perspective.  I'm definitely not trying to gouge anyone, but do need to bring them to market in order to make this deal worth it.  I like your human approach.

Rodney Harris · Answer

I would give them the notice 60 days out, renovate the vacant units once they move out and increase the rents to market! Best  of luck to you bro!!!! All my tenants renewed with a $60 increase in rent, im in a good location, so next year I’ll be going in rennovating and bringing up to market as well!!

Let me know how it goes bro!!!

Anthony Wick · Answer

@Daniel Zapata

I vote 60 day notice and raise to market.

Hans Christopher Struzyna · Answer

@Sharon Whipkey you are so right. I work in Alameda and lots of the "mom and pop" landlords are doing the same as you. Since the passage of rent control, we have seen the available inventory of rental units on the island shrink. Plus there are a lot of folks who are buying multi-family to move in and offset the cost to own with rental income. Those people underwrite in a different way so the effect rent control has on their bottom line is very different than traditional landlords.

Daniel Zapata · Answer

I'll definitely keep an eye out for the effects of rent control.  As of now, I sent out the notice to raise the rents to market.  They take effect in the beginning of July, but no moving notices as of yet.

Sharon Whipkey · Answer

As a landlord selling our rental in Alameda CA, due to several factors. Not least of which is the rent control issue.  Being a landlord that appreciated a long term tenant and thereby raised rents less than the market would bear, I suggest you get up to market rates as quickly as possible.  If we realized the impact rent control would impact us, we would have raised the rent to at least market rate, if not a little higher.  There's not only the issue of controlling the % rents can be raised a year, but also the cost of removing a tenant in order to sell the property.  Long term tenants are entitled to four months rent averaged over the previous 4 years (i think i'm right about the number of years).  Plus if the property doesn't sell the rents can not be more than the last tenants rent.  It's my understanding Alameda is considering even more restrictive rent control.

Part of what lead to rent control was investors buying apartment complexes and raising rates 100-200%  or in some cases more the tenants current rents. Also some large investors "evicted" tenants  en masse.  This created the perfect conditions for rent control advocates to gain support.  The ordinances are applied to larger complexes and smaller SFR investors the same.  Which effects people like us who bought the house to live in, then created a rental property once we moved to another property.

In my humble opinion, loosing smaller investors from the market, ensures tighter rental markets.  And, probably a really unpopular opinion, greed by large complex investors also drives rent control advocates.