Should I raise rent drastically or raise it in small quantities over time?

Question

Hello all,

So I have a Duplex property in a rough part of town. Originally I rented out my top unit in 2020 (3 bedrooms and 1 Bath) for $775.00. I didn't go too high because the area isn't all that great so I thought it was a fair price. I just realized yesterday that single family homes with only 2 bedrooms in the area, these new companies are charging $1300.00 in the same area. Obviously everything is going up because of inflation so now I want to raise rent on my tenants to at least $1050.00, tenants who have been loyal these past 3 years paying their $775.00.

How should I approach this situation?  Thanks.

Nathan Gesner · Answer

Stop guessing. Study your market closely for at least a couple months, and continue to watch it for as long as you own the property. You should look for rentals that are similar to yours in location, size, quality, and layout. Try not to compare your upstairs 3bed/1bath to a ground-floor 3bed/1bath. Try not to compare your 1948 rental to a 2014 rental. Your city is large enough that you should have plenty to compare to. You can even try "secret shopping" the competition by posing as a renter and viewing some comparable rentals on the market.

Rent rates should be set at market rate, or very close to it. Don't make the mistake of renting cheap and thinking Tenants will appreciate the low price and pay on time or take care of the rental; the exact opposite is more likely true.

I just looked at Rockford. I see a 3bed/1bath apartment for $1150 but it looks like a nicer area than you are describing. Another 3bed/1bath apartment rents for $850. So there's a lot of variation. You'll need to study closely for a period of time. Build a spreadsheet with address, size, amenities, etc. Track when it was listed and then when it rents. Watch for anything that is listed and sits on the market because that can indicate they set an unrealistic price. Keep tracking and soon you can ditch the spreadsheet and just store the information in your head.

Bill B. · Answer

Ps to previous post…

I assume you aren’t using a PM. Because it seems like you’re paying more to do it yourself. The average PM charges 8%. So you could get 8% under market while doing zero work. If you’re getting 20-30% under market you’re paying 10-20% (a couple hundred per month) for the privilege of being able to do all the work yourself.

Bill B. · Answer

Never get more than 10% below market rent. It’s just not safe any more. States are passing rent caps left and right. If one passes during your lease and the new cap is 5%. You’ll be raising rents $40/mo per year while costs are doing up 5% on the $1300. You’ll be losing more and more money every year. Luckily you won’t be able to sell because the new buyer can’t raise rents either.

Even “landlord friendly” Las Vegas is considering rent caps. I have a few months left on a 2 year lease that’s about 20% under market. If the rent cap passes before the lease expires I’ll be forced to move them out and sell. Luckily it’s a SFR so I can sell to an owner occupant. But if it was a 2-4 unit I’d be hosed.

Charles Carillo · Answer

@Freddy T.

You are not really comparing apples to apples; a unit in a duplex vs a single-family house. Have you found any closer comparables? Maybe a similar unit, nearby, in a 2-4 unit building.

Raising rent, when you have not done so in years, is more difficult. If you just raised it 3% a year, you would be at $850 (or $875 on renewal), and the tenants would most likely have stayed (no loss of rent). Going from $775 to $1,050 is like a 35% increase in rent, the tenants are most likely going to move. Are the tenants, good tenants? They pay rent on time, they respect the property, and their neighbors? If so, you might want to try and keep them. Maybe raise the rent by 5%-10%? Then raise another 3%-5% every year. If they move out, you can then reevaluate the market, perform repairs, and achieve full market rent right away.

I would rather keep good tenants, and raise rents incrementally than jack the rents every few years. Most people in a "rough part of town" do not have the financial means to cover large rent increases. Good, long-term tenants in these areas are also harder to find and keep.

Eliott Elias · Answer

What do you value more? Stability, or cash flow? If you want to avoid vacancy, increase rents gradually.

Konstantin Ginzburg · Answer

I would look closer into the comps you are using for other companies that are advertising rental units. First, make sure that you are comparing apples to apples. A single family home with 2 bedrooms will typically require higher rent than one unit in a multifamily property that has 2 bedrooms so begin looking at what others are charging in your area for a 2 bedroom unit. Also make sure that your property has the same amenities as the other ones you are comparing your property too. A final factor to consider is the neighborhood. Rentals in certain neighborhoods can command higher rents than nearby neighborhoods for a variety of reasons ranging from access to school districts to general prestige of a specific neighborhood. Make sure that you are comparing your property to properties in a similarly coveted neighborhood.

In regards to whether or not to raise prices up to market rate if you find that you are charging drastically under market, then it might be a better idea to gradually increase your rents each year rather than have a sudden jump in rental prices so you don't run the risk of high vacancy rates. 10% per year until the rents are at market rate would likely be a fair target to aim for. I would also factor in whether or not the tenants that you have are high quality tenants or not. If they treat your property with respect and minimize the problems they cause you, then I would do what I can to keep those tenants such as a gradual rental increase. If the tenants are prone to causing you a lot of problems and have a history of causing damage, then I would consider a less gradual rental increase. Also make sure that any rental increase is in line with the legal limits allowed by your local government.

Mason Liu · Answer

Agreed with Charles. If you have good tenants who take care of your property in a rough neighborhood, that might be worth making a bit less money as long as you are cash flowing with current rent after all money expenses and reserves. If a similar duplex 3/1 unit in the area rents for $1300/month (perhaps your current bottom unit is already), I would maybe look towards increasing the rent by $75/month a year or so. If the true market comparable is less than $1300/month, I would opt for a slower rate of increase.

Should I raise rent drastically or raise it in small quantities over time?

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