Investor · Houston, TX · Member since 2014 · 94 posts · 40 votes
I purchased a 9 unit multifamily in Tacoma last year. Almost all the units are below market rent, especially considering the recent improvements. The only unit that is not below market rent is the one that we just rented out this month at full market rent.
The previous landlord did not go up on rent for YEARS. Some people are 10 year plus residents, probably in part due to the cheap rent.
My property manager has suggested that I send out a letter at the beginning of March describing what the rental increase will be and that it will be effective April 1 and require a new one year lease (6 tenants are on month to month) his reasoning is that if we are to have vacancy it is best in the spring/summer. I agree with him.
How have y’all done this? Did you go up to full market rent or some portion thereof for existing tenants? Can anyone share with me a rental increase notification letter
I will be the contrarian here. I invest in multi-family to both improve the community where my buildings are located at and to also improve my own financial position. I purchase buildings all the time due to their being under performing assets. If the previous owner didn't raise the rents in 10 years, that is why I now own the building.
Send a letter to the tenants telling them that all vacancies will be turned over with an expectation of market rents for new tenants. Publish what those rents are and indicate that you will be moving all rents to better align with the market. Assuming that everyone is on a month to month lease, my first rent increase will bridge 50% of the gap between current and market rents. For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates. Your new tenants should be the best of the best so you can set a precedent for who gets into your building.
For everyone that remains, three months later I will again bridge 50% of the gap between current and market rents. For everyone that leaves, I now have units that I can turnover, bring up to speed and put back on the market at or above market rates.
Lather, Rinse, Repeat until the entire building is at market. It is your asset, you owe it to yourself and to the rest of the community for it to be as valuable as it can be.
I am in the same situation. Rents are all 500-550 and should be 700-800 I bought the place in September and the leases expire between April and August. Here is what I am doing:
1. Adding some value put in insulation this weekend, putting up gutters and some other stuff.
2. Telling tenets now that the leases are going to 675 per month if they do a year lease and 700 if they go month to month.
3. If they want to break the lease because they find a place that is more affordable and they need to jump I will let them out with a 30 day notice. I know they can’t but it seems like a nice jester and some folks may need to take a step down.
It is not fun but I bought the place because I knew that I could raise the rents. I am hoping to buy another small apartment and do the same thing. If I couldn’t raise the rents to market or at least close to it I may as well invest in stocks. It would defeat the purpose searching so hard for great deals.
Just so we are clear you are saying go up 50% of the market difference now, then go up the other 50% a few months in the future? Do you write this in to your lease?
Yes, that is what I am saying. All my rent increase communications to the tenants are done via a letter and an updated lease. We take advantage of the fact that most of the tenants are month to month when we purchase the building, so we send out the letter and then follow-up with the updated lease. For one 17 unit building - rents are up over 17% in 11 months, the building is better and the tenants are better.
Have you considered trying to stagger the rent increases? If you try to increase all six at the same time, you may get an exodus. If you take them slowly, and get a vacancy, you can rehab the vacancy and push to market.
If the rents are that below market, the tenants know it. As long as you provide a good product to your tenants, I would continue with the rent increases
My approach is very simple in a situation such as yours since the new higher rents will attract better quality tenants. There is a lot of money on the table not only in rental income but also in considerably raising your property value based on cap rates. Based on your PMs confidence alone I would have no problem systematically replacing every tenant with new and better tenants at market rate. Contrary to many hobby landlords approach based on fear I always replace tenants with better tenants through thorough screening. The assumption that you are replacing a good low paying tenant with a high paying bad tenant is illogical and based entirely on a landlords lack of either skill in operating their business or a lack in confidence.
Hobby or business, fear or money. You decide what type of operation you intend to have when you start and stick to it.
First report back on progress. We sent out the required 30 and 60 day notices (for the two tenants getting assistance from THA).
We went up a full $1550 per month across 9 units and lost ZERO tenants and they all signed the year lease, no more month to month. I am beginning to think that I didn't go up enough!
June was our first month collecting the new full rent and it was sure nice.
@Stephen Watt Yes sir, they are close. I plan on going up again incrementally next year and not letting the rent get as far behind as the previous owner did.