Raising rent on a newly acquired unit with current tenants
Williamsville, NY · Member since 2015 · 80 posts · 34 votes
Raising rent on a newly acquired unit with current tenants
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Investor · Woonsocket, RI · Member since 2008 · 46 posts · 24 votes
10yWith regards to raising rents, just remember to keep the money flowing. There is usually a reason the rents are below market. If it is deferred maintenance then watch the numbers very closely.
Sometimes it is better to have a tenant at $700 per month for the next year rather than raise the rent to the market rate (Say $850) and have the unit empty for a month while you repaint and fix all the little things the tenant had learnt to live with. The numbers will vary, but if the renovation costs are $1000 and the lost rent (at the old rate) is $700, then it is going to take you $1700/ $150 months (approx 12 months) before you see the benefit of the new rent. If you did this with all 3 units at once, it would still take a year to be ahead of the curve but you would have that one month where you had no income to pay any of the bills and would have to find $3000 for the renovations. So you may decide to leave things as they are until you have put aside enough money to cover the renovations and vacancy and only tackle 1 at a time.
I am not saying you should keep on deferring the maintenance, just think about your overall cash flow when deciding when to act.
12 Replies
- Göteborg, Sweden · Member since 2013 · 60 posts · 2 votes10y
Hello Michael !
I have not yet started to invest but this is what i have learned so far:
1: Figure out why they are currently under market value. ( is it the property that is in bad condition ? If so, renovate up to standards. Is the demand in the area low? ( maybe it's better to wait out the low demand a little and stay at the current rent to not get a vacancy )
The goal here is to increase cashflow and not to fill all the units ( if you can choose between to have 3 renters with lower rents or 2 renters with 1 vacancy it's better to have lower rent and 3 renters)
If you still aren't satisfied with the situation, you can try and raise the rent in one of the month-to-month units to try the market, if the rent works and u get a renter=good, continue with the other 2, if not, switch back to the old rent to fill your unit again.
About the month-to-month leases, i would personally try to switch them to 6-12 month leases with different expire periods ( 1 in april, 1 in august and 1 in december/spread out over the year so you get more flexibility with higher/lower rents when the leases are up to maximize your cashflow) this type of thinking works better the more units you have.
I would personally do this to have less turnover and some stability on the rent income side ( preferable 6 months, then you are not to far away from good stability @ 1 year but still have a little flexibility as the month to month lease. I belive this is the better solution becouse in theory you can have 11 turnovers in 1 year ( 1 at the end of each month ) and now i don't even count with the turnover timerate so you would not only have more turnover rate, you would also loose rental income for the days you can't rent out the unit. If you look at it from the big picture you will/would loose more money on month to month deals rather than longer/6 month leases. I belive you will have better quality renter with longer leases also. From what i have been reading you can take around 5-10% more for the risk of month to month, but in the long run i think you will loose, it's up to you to decide.
*Just wanted to mention as a friendly reminder that all of this should you guys have planned BEFORE buying the property/have a bussiness plan in place so you know what actions to take to maximize your cashflow for the property*
!! Warning/Caution !!
I have no experience with the legals/papperwork required to make the changes i just wrote above, so check that part up before taking any action !
- Lansing, MI · Member since 2015 · 301 posts · 149 votes10y
I'd leave them month-to-month - it gives you as the landlord more flexibility in raising rents, making changes, or evicting the tenant easier (depending on your state law). I recently bought a duplex and the tenants were month-to-month and I just had to give 30 day notice to vacate and have it delivered to them and that was it. They were also $300 under market and were smokers. Both not good.
- 10yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
Welcome to BiggerPockets, @Michael Karl.
You don't say how far below market they are, so I'm going to assume significantly. You have to honor the terms of the annual lease until it expires, so don't even worry about that one.
Do you know if the other two tenants were screened at all? I would keep them month to month until you have the chance to screen them (at your expense, it isn't their fault the building sold) and see if they pass your standards. If they do, then offer them a year long lease. If they do not, keep them month to month. It is far easier to evict on a month to month lease. Buffalo isn't rent controlled, right?
Depending on how far below market they are, I'd give them notice that it is going up. Make sure you comply with your state laws, you may have to give them 30 or 60 days notice before it goes up.
Again check with your laws (and you'll hear that a lot because every state has their own) but it seems perfectly reasonable to offer a 1-year lease at X or they can stay month to month at X+.
- Real Estate Investor · Chicago, IL · Member since 2014 · 286 posts · 159 votes10y
If you are from Buffalo, you need to get renters in place before its cold. You don't want them moving out in November which could very well leave the unit vacant for months. What I have done is raise the rent a little, but only accept a lease. Maybe it's just a 9 month lease that terminates in the spring.
- Williamsville, NY · Member since 2015 · 80 posts · 34 votes10y
thank you all for your input on this topic, all of the suggestions so far have been very helpful. The weather concerns that were brought up is something I have thought a lot about. The thought behind the month to month tenants becoming more long term to prevent them moving out during the cold months
- Investor · Woonsocket, RI · Member since 2008 · 46 posts · 24 votes10y
With regards to raising rents, just remember to keep the money flowing. There is usually a reason the rents are below market. If it is deferred maintenance then watch the numbers very closely.
Sometimes it is better to have a tenant at $700 per month for the next year rather than raise the rent to the market rate (Say $850) and have the unit empty for a month while you repaint and fix all the little things the tenant had learnt to live with. The numbers will vary, but if the renovation costs are $1000 and the lost rent (at the old rate) is $700, then it is going to take you $1700/ $150 months (approx 12 months) before you see the benefit of the new rent. If you did this with all 3 units at once, it would still take a year to be ahead of the curve but you would have that one month where you had no income to pay any of the bills and would have to find $3000 for the renovations. So you may decide to leave things as they are until you have put aside enough money to cover the renovations and vacancy and only tackle 1 at a time.
I am not saying you should keep on deferring the maintenance, just think about your overall cash flow when deciding when to act.
- Buffalo, NY · Member since 2016 · 4 posts · 0 votes10yWe just recently bought a double in Kenmore, NY and had the same issue at first. Month to month tenants but like the last reply, we didn't and couldn't afford to lose the tenant and search for a month or two. So we put together a 6 month lease to get them to May (prime weather and rental season in Buffalo...at least we think) and then if they were good tenants and we approved (they were) we had them sign a year lease from May 16- May 17 with a 3% increase in rent from last year. Seemed to work in our favor. Now our goal is to make slight updates here and there when the tenants are out of town or when mutually agreed upon. Hope this helps!
- Member since 2016 · 13k+ posts · 12k+ votes10y
Don't be afraid to set rents at what a property is worth. The reason to invest is to make money and the best time to make changes is when you first buy. If you plan your business around vacancies as opposed to optimising monthly income you are short sited. Every tenant eventually moves so the costs will be exactly the same for each in time while not maximising rents will be a added ongoing loss from day one. You can have a one month loss in rent today and start collecting an extra $100 per month immediately or you can lose a $100 per month for the next year and then have a one month vacancy when they decide to move anyway.
The sooner you get each unit producing maximum returns the easier it will be to cover your monthly expenses. A short term vacancy now is less costly than a ongoing monthly loss due to below market rents plus a short term vacancy down the road. The vacancy loss is exactly the same the income is not.
- Investor · Woonsocket, RI · Member since 2008 · 46 posts · 24 votes10y
If you are just starting out and do not have a lot of reserves, then a slower pace is more prudent but don't be afraid to raise the rents once you are in a position to.
- 10yPenny ClarkPro MemberSacramento, CA · Member since 2014 · 513 posts · 319 votes
@Michael Karl, Lots of great suggestions here. However, because you are asking basic questions about rent increases, how much to increase the rent, etc., you should first become familiar with the landlord-tenant laws in your state and/or city. Below is a link that can help you get started and will help answer a lot of those questions:
http://www.nolo.com/legal-encyclopedia/overview-landlord-tenant-laws-new-york.html
- Williamsville, NY · Member since 2015 · 80 posts · 34 votes10y
I want to thank everyone that his posted info in here for me. This community is great and all the help will be taken into consideration.
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