How to increase rents with rent control

Question

Hey BP Community! A 10+ unit multifamily deal I'm underwriting in NJ is in a location bound by local rent control laws. The rents vary amongst the units and are under-market so I would want to increase them. What is the best way to do that given the rent control laws? Are there strategies I could implement to increase the rents and force appreciation on the building?

Douglas Holden · Answer

@Shachar Avraham

Check with your city to see what they have as the registered rent. This is key.

The amount that you are allowed to increase each year is based off of the registered rent role.  Make sure that you increase the maximum each year.

Also, in the event that you have a tenant that you choose not to increase the max (you feel sorry for them, they perform tasks for the building for reduced rent, etc) make sure you still show the max rent in the city registry. That is what your allowed increase are based on legally.

If tenants move out and you are able to value add via renovation, there are formulas for rent increases based on renovation costs. This amount varies by city and you need to speak to your city to find out their formula.

Mark F. · Answer

Yes you are required to renew their lease, even you go to a m2m. Nj is one of few states where you can't boot someone due to a lease ending. I'd read up on this

https://www.google.com/url?sa=...

Sam Abraham · Answer

@Aaron K. Totally agree, thanks

@Mark F. Yup, I saw that in my research. Is a landlord required to renew the tenant at the time of lease expiration or can they get a new tenant?

@Lien Vuong I like your thinking there. What expenses would you recommend tacking onto the tenant?

Lien Vuong · Answer

Is there another way to reduce expenses or pad that onto the cost of the tenant instead? Another way to look at it instead of just increase rents but rather decrease expense simultaneously.

Mark F. · Answer

Depends on which town. Each one has guidelines in their city code as to what you can raise every year. In my experience with NJ, its limited to 2%-5% or the national CPI which is normally 1%-2%. If you're banking on force appreciation thru raised rents, it could take over 5 years as you could be talking as little as $20 a year. Unless the tenant leaves which if their rent is so low they'll be in no hurry, even with small incremental rent raises.

What town is this?

Aaron K. · Answer

If they are well under market, make sure to raise them the max you can each year, with luck, you purchase at current rents and just by keeping on top of things you increase the resale value, also when people move out do your best to get rents up to market.