Raising rent for a two year lease in Jersey City Heights

[Julie Verardi]

Hi, 

I have excellent tenants in a 3 bedroom, fully finished basement and backyard multifamily in Jersey City Heights. They want to do a 2 year lease and because they are such great tenants I'm fine with doing that however, how much should I bump the rent up before getting locked into a 2 year lease with them?I've heard the rule of thumb should be 5% ever lease? What do you guys think?

[Account Closed]

Hi Julie, I'm in the same exact situation as you: 3 bedroom 2-family with a finished basement and backyard in the heights.  Excellent tenants as well.  I'd see what the going rent in your area is using craigslist or rentometer dot com and get as close to that as possible, with a possible discount for being good long-term tenants.  If you are already close to going rent, perhaps a 5% increase split over the 2 years.

[Jeff Rabinowitz]

The extended lease is for your tenant's benefit, not yours. If you plan on raising the rent 5% annually you should fold that into the lease. I have only offered extended leases a few times but when I did I explained there would be a rent increase after the first year and, rather than escalate the rent in the lease after one year, I offered to split the difference and offer the two year lease at the average price--for the tenant's convenience, of course. Since this was at my tenant's request they agreed. I ended up getting a slight rent increase in the first year and established the pattern for future rent increases.

[Julie Verardi]

@Jeff Rabinowitz thanks for the input. I guess it benefits me as well since I know they won't be leaving and they are solid tenants. When you split the difference did you keep the rent for 2 years at 5% bump each year or did you do like 7% bump consistent for the 2 years? I understand what you're saying about letting them know ahead of time there will be a 5% bump but I got lost at what you were saying about splitting the difference. 

[Julie Verardi]

@Jeff Rabinowitz  @Account Closed are you guys saying I can change the rent increase half way through on a 2 year lease?

[Jeff Rabinowitz]

If the rent increase was to be 5% after one year--I wrote the lease for 2.5% higher than the initial rent for the entire two year period. Yes, you can specify in the lease that rent will increase at month 13 (the beginning of the second year). You could specify that it increases at any time that both parties agree with. You could make it an automatic increase or make the increase dependent on certain other events occurring. For example, you could specify that the rent increase will take effect if taxes rise a certain amount, if the CPI rises a certain amount, or if prevailing rent rates rise a certain amount. This is called an escalation clause.

An extended lease does not guarantee that a tenant will stay an extended period of time. It gives them the right to stay but tenants can and will leave when they wish to. Yes, the lease gives the landlord the right to collect some reasonable rent if they cannot quickly re-rent the unit and show they have been diligent with their efforts in court. They may even be able to collect if the tenant is collectable and can be located. 

I generally prefer month to month leases for my long term tenants. I usually start with an annual lease and renew it on a month to month basis for tenants I wish to keep. That way the lease can easily be terminated when either party wishes and rent can be increased when it is time. It keeps both landlord and tenant responsible to the other.

[Sunny Suh]

Julie!!! This is definitely tricky. 

Man, i talk to a few old folks around the neighborhood and they actually lowered their rent for good tenants because they used to be hard to come by. Also remember realtors talking about how agents wouldn't collect a broker fee for the heights because it wasn't easy to get people to move here. 

Anyway, I would look into seeing if you are receiving roughly the market rate like Andrew suggested, and then judge what you want to do. 

Are you good at negotiating? Maybe your tenants don't want ANY increase, but they'd be willing to chip in for a new fridge and oven so a concession of this sort can be some sort of middle ground?

Or maybe upgrade something to justify an increase?

2.5% for the first and second year rent sounds reasonable, good luck with whatever option you go with!