Good tenants but want to raise the rent

Buying & Selling Real Estate
5yFollow

Good tenants but want to raise the rent

Melissa S Vrobel
Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes

Hi all BP,

I need some guidance.  I have a tenant that has been great.  They moved from my one rental to a larger one and agreed to the rent.  Fast forward 5 yrs and I haven't raised their rent.  I am now losing money because of taxes and insurance which has increased each yr.  It is possible that I may need to raise their rent by $350 just to break even.  My long term goal is to hold but I also offered to sell them the house.

Question is how do I have the difficult conversation about raising the rent on them if they don't want to buy? 

Thanks,

Mel

0Reply
46 views

Most Popular Reply

Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
5y

The rental rate should be based on market rates rather than what you need to break even.

9Reply
See this reply in the discussion

22 Replies

Jump to latestLatest
  • Curt DavisBusiness Member
    Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
    5y
    Such a drastic increase would most likely drive them to move out. Then you will have the joy of make-ready repairs and paying your mortgage for 1-2 months.  I might suggest a solution to do smaller increases over the next few years to get them to where you need them.
    Curt Davis - KAIZEN Realty538 Reviews
    WebsiteView Page
    3Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    5y

    The rental rate should be based on market rates rather than what you need to break even.

    9Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    5y

    It's not a difficult conversation, if what you say is true. Bring your numbers and paperwork with you. Show them what your expenses are, show them your losses. Explain how you're losing money.

    But what's been said is absolutely true. You've got to be smarter about setting rent.

    1Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Mike Dymski:

    The rental rate should be based on market rates rather than what you need to break even.

     Thanks Mike.  From the beginning they were about 300 under market rate.  It isn't about cap rate.  I am using real estate for long term retirement play.  I thought that I would move back in 6 yrs (which they knew) and they agreed to cover the mortgage.  I then found my dream home last year so this is now a permanent rental.

    0Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Jim K.:

    It's not a difficult conversation, if what you say is true. Bring your numbers and paperwork with you. Show them what your expenses are, show them your losses. Explain how you're losing money.

    But what's been said is absolutely true. You've got to be smarter about setting rent.

    Thanks Jim...  I should have increased it every year.  Well, lesson learned.  

    2Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Curt Davis:
    Such a drastic increase would most likely drive them to move out. Then you will have the joy of make-ready repairs and paying your mortgage for 1-2 months.  I might suggest a solution to do smaller increases over the next few years to get them to where you need them.

    @Curt Davis... thanks.  Great idea

    0Reply
  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    5y

    @Melissa S Vrobel


    I did the same. With a retirement townhome on Lake Mtka that I have yet to move into. After 5 years they wanted to extend and I simply broke it to them. Taxes are up a couple thousand a year. It’s going to be an extra $270/mo, they didn’t blink. They’ve been there another 2 years and we’e about to have the same conversation again. This time more about they’re paying me not to use it personally. 

    2Reply
  • Allen McGlashing
    Investor · Cambridge, MA · Member since 2017 · 195 posts · 106 votes
    5y

    I would explain to your tenants that if you don’t raise the rents you will have to put the house up for sale. Hopefully your rents are cash flow positive at market rates if not that property might be time to sell because it doesn’t make sense anymore and that happens in real estate.

    2Reply
  • Shane Littrell
    Member since 2018 · 7 posts · 21 votes
    5y

    @Melissa S Vrobel

    If the tenants have not had their rent increased in five years then they know they are getting an amazing price. Tenants are not completely in the dark on rental rates, they probably tell their friends about the great price and how smart they are to get it.

    I don’t think this conversation is as hard as you are imagining it to be. The tenant is never going to ask you to increase the rent but will always anticipate it. If you do raise it $350 and they get mad and move out can they move into something similar for cheaper? You mentioned the original agreed rent was $300 under market 5 years ago...I’d bet a $350 raise is still well under market rate now then.

    I would look around, call some management companies, attend a local (closest) REI meeting and get a clear understanding of what market rent is for comparable units. Then bring this information to the tenant and explain you have to bring the rent up and it will still be below market. Remember they will still need to live somewhere. After that raise the rents 3% each year automatically at least, and review every year or two to make sure you are not over/under too much.

    1Reply
  • Monia S.
    Member since 2021 · 17 posts · 1 vote
    5y

    @Melissa S Vrobel that is a difficult situation to be in. I agree with some who said that the increase may cause them to leave, especially now with everything thats going on. It would be ashame to lose an ongoing good tenant with a good payment history because of a situation that is hopefully temporary. Have you considered selling the smaller house they moved from?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y
    Originally posted by @Melissa S Vrobel:
    Originally posted by @Mike Dymski:

    The rental rate should be based on market rates rather than what you need to break even.

     Thanks Mike.  From the beginning they were about 300 under market rate.  It isn't about cap rate.  I am using real estate for long term retirement play.  I thought that I would move back in 6 yrs (which they knew) and they agreed to cover the mortgage.  I then found my dream home last year so this is now a permanent rental.

    The problem is if you are "just covering the mortgage" you are NOT even breaking even. Every year that someone lives in your property, all the major components are degrading. For example an HVAC system has a 20 year life. Say that HVAC system costs $7000 to replace. A tenant living there 5 years, just consumed 5/20 of the life of that system. That means CAPEX cost of 25% of the $7000 which equals $1750 or $350 per year or $29 per month. This is why every deal analyzer has allocation for CAPEX and repairs as an expense. CAPEX is a silent killer of a rental business. Because it happens over time, you don't see the monetary results until the big expense hits. All the sudden you are strapped with thousands of dollars in repairs on a break even rental.

    This is an easy conversation to have with your tenant. It sounds like they are paying several hundred under fair market value. They know that and even if they act frustrated by a rent increase, they can shop on Zillow and see that your price is still fair. Just be honest with them and say something like this:

    "Dear Tenant, The cost of your home has been increasing yearly over the last 5 years as taxes and insurance costs have risen. It is my mistake that I have been taking this loss every year. This house is now costing me $350 more per month than you are paying. This is not sustainable and it is necessary for me to raise your rent by $350 per month starting on October 1. I did fair market comparison and similar houses are renting for $x per month. That means even with the rent increase, your price is still $X under market value. I believe this is fair and still an excellent value for you. If you decide the new rent price is not workable for your budget, I totally understand. In that case please just submit 30 day notice. You have been a great tenant and I hope you decide to stick around, but should you decide to leave I totally understand."

    Going forward I would push a rent increase every year. Even if it is just $25, it is best to keep them used to increases. The worst thing you can do is never increase rent. I know you thought you were doing a good thing, but you created a bigger problem. You could have increased rent $70 every year and it would have avoided this huge increase.

    It may actually be good if they choose to give notice and move out. You may be able to get $500 or $600 more a month with a new tenant. Don't be afraid of vacancy and leasing. There is a huge housing shortage in America, so there is a line of people waiting.

    4Reply
  • Sean McKee
    Rental Property Investor · Chicago, IL · Member since 2017 · 269 posts · 189 votes
    5y

    @Melissa S Vrobel- You will likely lose them as a tenants, unless they are willing to buy it.  A 350+ rent increase will be a sticker shock to them and they likely won't understand it. There's a good a chance they might be offended and get angry.  This is all ok and part of the business. Unless you can afford the monthly losses and the appreciation will more than offset the losses, I would not advise to keep losing money. Losing money drains your resources and leaves you exposed to economic shocks, like an eviction moratorium or leaky roof. And the worst part is that nobody will care that you were a nice landlord and spent the last 5 years renting at below market rents to your tenants.

    0Reply
  • Will GastonPro Member
    Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes
    5y

    @Melissa S Vrobel I'm sure there is one but I cannot think of one example of a business that does not raise it's prices. Don't let fear drive your decision. Spend some time looking at comparable properties and their rent rates before you proceed.

    The grocery store and the Italian restaurant down the street have no problems raising prices and neither should you.

    2Reply
  • Jim Stout
    Real Estate Broker · Broker in FL, GA & NC · Member since 2021 · 54 posts · 34 votes
    5y

    Once you really do the research to see what the market rents are and if you find they would cover the $350/mo or more then chances are your tenant already knows they should be paying more. Renters often know the market better than some landlords. One way to soften the blow would be to show them that had you been raising the rents $100/mo the past 5 years plus this upcoming year then the $350+/mo won't look as bad to them.

    1Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Mike Dymski:

    The rental rate should be based on market rates rather than what you need to break even.

    Thanks Mike. I am aware of that. It isn't a question of market rate (which has skyrocketed), it is a question about what is fair for both of us. Their current rent is much lower than market. I only have 300k+ homes in a really nice PUD. I don't have low rents to begin with and I tend not to raise the rent on good tenants. I am learning that after 5+ years of doing that... it puts me at a loss. I need to figure out how to be fair but set automatic increases so this doesn't happen to my other properties (which have 4+ year tenant, and coming up on 2 year tenant).

    0Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Allen McGlashing:

    I would explain to your tenants that if you don’t raise the rents you will have to put the house up for sale. Hopefully your rents are cash flow positive at market rates if not that property might be time to sell because it doesn’t make sense anymore and that happens in real estate.

     Hi Allen... Thanks for the input.  Rental rates are going up substantially in my town.  I could increase the rent by $700 to match market.  That would give me a nice cash flow.  My mistake was only charging them the mortgage at the time because I knew that they would take good care of it and I planned on moving back in. Then I found a home that I liked better.

    0Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Monia S.:

    @Melissa S Vrobel that is a difficult situation to be in. I agree with some who said that the increase may cause them to leave, especially now with everything thats going on. It would be ashame to lose an ongoing good tenant with a good payment history because of a situation that is hopefully temporary. Have you considered selling the smaller house they moved from?

     Hi Monia...  I am not sure what "everything going on" refers to but my market is white hot.  There are never more than 4 homes for rent in town and there are no apartments or multi-family.  The smaller home has a long term tenant who just signed for 2 more years.  It is cash flow positive and I wouldn't sell.  Especially, since I can't buy another rental due to running my own business which the banks don't like.  

    0Reply
  • Jason Kucharski
    Specialist · Orlando, FL · Member since 2016 · 13 posts · 1 vote
    5y

    I would have the frank conversation with your tenants about the situation and raise the rent to market values to the point where you're not just breaking even. Make sure you're covering all expenses and saving for capital expenditures for the "long term game". If your tenants are not willing or able to cover the increase, then I would prepare for a vacancy. List your property for current market values if you can weather the loss of income as you prepare the home for rent. 

    This is a business and no point in running in the red. 

    1Reply
  • Account Closed
    Member since 2021 · 237 posts · 153 votes
    5y

    @Melissa S Vrobel

    $350 on $2,000 would be tolerable. $350 on $1,000 might be tolerable depending on what has happens to your market lately. $350 on $700 would be pretty darn intolerable for many.

    What’s the rent now?

    0Reply
  • Melissa S Vrobel
    OP
    Investor · Orlando, FL · Member since 2021 · 79 posts · 36 votes
    5y
    Originally posted by @Account Closed:

    @Melissa S Vrobel

    $350 on $2,000 would be tolerable. $350 on $1,000 might be tolerable depending on what has happens to your market lately. $350 on $700 would be pretty darn intolerable for many.

    What’s the rent now?

    $1500... There is a new investor asking $2800.  Seems high to me.  $2000 to 2200 is more reasonable.

    0Reply
  • Account Closed
    Member since 2021 · 237 posts · 153 votes
    5y

    @Melissa S Vrobel

    I don’t fully follow when you said a new investor is asking $2,800 and that is unreasonable? What is market rent? If you’re $500 behind market, that’s $6k annually… that’s a LOT. You would want to solve that problem ASAP. At some point you’re far enough below market that the economics of a turnover are FAR outweighed by the increase to market rent. This is a business decision only unless this renter is family.

    0Reply
  • Monia S.
    Member since 2021 · 17 posts · 1 vote
    5y

    @Melissa S Vrobel I was referring to what you had initially said, "taxes and insurance being raised each year", and referencing the fact that some renters may choose to leave or break their lease when asked for higher rent. I definitely understand that when your renting a property you are in it to make money and after your response it makes sense not to sell the other property. However good long term tenants are not always easy to find which is all I was pointing out in your situation. If you have not raised the rent at all for five years and now that things may be tight for renters, decide to raise the rent by that much, it may cause them to leave and you maybe faced with a bigger problem. When I said I agreed with the person who said it may cause them to leave- I should have continued by saying I agree with his entire statement... to raise the rent in increments which, in my opinion, would be more reasonable.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free