New owner raising rent

[Chris Mandle]

Just acquired my first REI. 3 plex in a C neighborhood and I would like to raise rent. Each unit is occupied and they are all on month to month. I was thinking of sending them a notice that in 3 months rent will be increasing by $50. Each unit Would still be under value by about $300..along with raising rent I would like to get them on a 1 year lease. My concern is if I raise rent but give them 3 months notice they may not pay at all. But if I don't give them notice they may be very upset. Thoughts on how to execute this?

[Joe P.]

I know this sounds crazy, and there is some great advice here, but talk to each tenant individually if you can and find out the deal.

If the units are in terrible shape, you're not going to be able to raise the rent much or get someone in, now you have vacancy and rehab to contend with.

If the units are pristine, maybe the tenants know they're paying under market value. So, let them know you're thinking of raising the rent, not because of them, but because of the market. Vacancy is the one of the worst expenses you can deal with, so the point is to keep the tenant, keep them content, and extract the rent needed.

Since they're also month-to-month, I would only do introductions to start. You need to establish a relationship with these folks in my opinion -- they need to pay you on-time and with the full balance, and may need you to help with maintenance items. If you're able to get onto an operating schedule with these folks for a couple of months, I suggest you do so before offering up a year lease and/or a rent increase.

Also, finally, now that you've closed and they have your info, do not be surprised if you start to hear about a significant amount of deferred maintenance. I hope you have some reserves ready to handle it because it is coming. The previous owner, no doubt, get putting off minor (and maybe some major) items so it comes out of your pocket, not his. This is one of the most important aspects for any new investor that I share with them -- if you don't have a reserve amount baked into your purchase ($5k to $10k depending on age) you will get hammered the first few months. It should be a line item outside your spreadsheet called deferred maintenance, and the budget should last for the first year.