Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
Hi all,
I recently purchased a 4 unit multi family property in Taunton, MA. I bought the property in September 2019.
They are all 2 bedroom 1 bath and approx. 1,000 ft2. The units are rented way below market value (It was an older owner who seldom raised the rents) I inherited all the tenants with these low rents. The rents are covering all expenses with ~$100-$200/month total to spare. (15 year note, 14 years left)
The rents are $870, $925, $950, and $1000.
The market value is ~$1250-$1300/unit. I have a big heart, but I also like to think I have a big brain. The holidays are coming up, so I’ve already dismissed doing much of anything until after the new year. Do you have any advice what I should do without upsetting my tenants too much? How much would you raise the rent? All comments are welcome please. Thank you in advance!
First thing you want to do is ensure any and all rent increases fall in line with local regulations (if any). When do each of the leases expire? It may be easier for you to wait to raise the rent after the expiration in order to give the tenants enough time to adjust their budgets and not cause any issues with the previous lease agreement. Regardless, when the time comes to raise the rent my advice would be to do it in smaller increments. If you're paying $870 in rent and then your landlord tells you next month you're paying $1250, that tenant may not be too thrilled. That's an extreme example, but a lot of data shows that increments of $100 and up scare tenants more than smaller increments. Instead, raise rent either 3-5% or in $50 to $75 increments depending on the situation you feel is appropriate. Then proceed to increase rent yearly with each new lease drawn up and let the tenants know that this will happen each year or however long you want it to. Make sure you let the tenants know why rent is being increased and to keep the increases fairly consistent. It is a slower process, but just by increasing rent $50 you add an extra $600 coming your way a year.
What is the condition of each unit? Do they have some deferred maintenance that you plan to take care of when the tenants leave?
I think you've got two options:
Raise rent to full market value - This will cause some (maybe all) to leave but will give you the chance to fully turn and fill the units with new tenants.
Raise rent gradually each year. - Maybe bring everyone up to $1,000 and then go up gradually from there until you are at full market rent.
With either option you are likely to lose the lower paying tenants by the end, so it is just whether you want to peel the band aid now or stretch it out over time.
@Jack Medford Thank you so much for your insight, Jack. It is so extremely helpful. I will ponder for another day or two but your strategy has certainly gotten me closer to a solution. Thank you so much again for your response and help!
If they all leave will you be ok financially to pay for everything out of your pocket . Tenants are very monthly payment sensitive That might be a reality for you if you don’t play your cards right here
@Dennis M. Thanks Dennis! I just wonder where they would move to considering I would still be well below market value even if I went up $250-$300. I will increase slowly I think. Thanks!
@Dennis M. Thanks Dennis! I just wonder where they would move to considering I would still be well below market value even if I went up $250-$300. I will increase slowly I think. Thanks!
Friends or family or roommate with others . I’ve had folks leave for 50 bucks don’t think it can’t happen
Make sure you are comparing apples to apples on your comp rent rates.
If you are that far below, there is a good chance you have a TON of differed maintenance that will need to be addressed to warrant a comparison to other available units. If you place is old and beaten down, you cant compare it to the place that has new paint, new floors, newer appliances etc etc.
The tenant will then look at "value"..... pay $1200 to live in a run down old place....or $1300 to live in a place where everything is nice and newer.....
You jack the rent a lot and they leave.... you need to drop serious $$ on rehab..... then you get market. You take the $$ hit now and plow forward
You move it up some and in smaller increments and they stay for at least awhile longer ...... you drop the $$ when they leave and get market..... your $$ outlay is farther down the road....
You leave it "as is" and just rehab as the tenants leave.....but you leave $$ on the table for a long time in some cases if the tenant never leave.
You need to honestly look at how much the turn over rehab is gonna cost you and how quickly you can recoup that by being at market sooner rather than later
I think you should raise the rents slowly over time and if any questions are asked you should just be straight with the tenants and tell them that this is what the market is, and you cannot change that.
@Bud Gaffney I totally relate to the big heart thing; however, that hasn't always been a good attribute in the land-lording business, for me.
Of course, you don't think to be unnecessarily mean but you want to be firm/fair.
As for rent levels, you want to make sure you are well-capitalized before raising rents because if the tenants start moving one by one because they heard that you raised so and so rent and you are left with 3 vacant units all of a sudden, can you handle that? (this is the unlikely but possible).
Furthermore, when a tenant moves out you will inevitably have to spend money on turnover in order to get those rent premiums you mentioned, do you have the capital to deploy for that?
These are the questions you, and only, can answer to determine the next best steps.
Yes, you want to compare apples to apples when evaluating the competition in your market. That said, you don't want to be the last landlord who hasn't raise rents for a while.
The most justified way to raise rents would be to make some upgrades to the units, it would be hard to raise rents without doing at the least some cosmetic upgrades and as others said in the thread you would definitely 1 need to check with your local regulations to see just how far you can raise rents and 2 make sure that the leases have expired as I pretty sure it's universal that you have to honor those leases.
A suggestion would be to get them on a month to month lease and then work on the units one or 2 at a time and after any deferred maintenance has been addressed and/or some upgrades have been made then look into raising rents.
Also, consider how good the current tenants are and how hard it would be to replace them and how long it will take to replace them as far as the immediate situation.
@William Nelson Will! I love this approach! If rents are $870, $925, $950, and $1000 and I raise them ALL to $1250 (market value) and do your approach, what do you think the push back will be?
Have you ever had such drastic increases in rent such as this example? Thanks SO much for your insight and taking the time to help me out. It truly means the world to me. I look forward to reading your response.
Their probably aware of new ownership so now is time for change. Make sure you can afford the vacancy give them option out, stay and pay with a remodel. I would give them 90 days notice 30 days to commit.
I agree that there's probably deferred maintenance. I think you need to address that as well as the sub market rents. If it were me, I'd inquire of the tenants what needs to be addressed? ie, have them give you a discrepancy list. Then make those repairs to show you care about their situation. That will make rent increases more palatable. And I agree with others that the increases should be small. You can come to market rates on turnovers.
All of my increases have been around $100 to $200 per unit - it sounds like you have bigger increases, but as long as you can provide the logic/numbers to back it up and give tenants time to prepare, I’ve had pretty good results.
As for expected push-back, you need to be firm but fair and try to be a good listener. Everyone is going to have a story, and explain that it’s not possible for them to afford the unit. So listen to them, then refer to the logic/numbers that show your rent raise is the same as every other place in the area and explain that you’re trying to help out as much as possible with the 90-day grace period and you even want to make the unit nicer for them because you want them to stay as much as they want to stay.
I hope this helps. Let me know if you have any additional questions.
@Bud Gaffney - How are the tenants in general - Do they pay their rent on time; are they neat, clean?..Good tenants know that they are good tenants. If you raise the rent are you prepared for any of them to leave? How is your lease structured?Are vacancies easy to fill in your area? Although nobody really likes to move a good tenant will shop around for a better deal especially when a new landlord comes in because they like to test the water - "if i pay this much i'm not staying, ill look for a better place". Make sure the tenants understand why the rents are being raised but do it in increments under $100 (double digits are friendlier). Make a rent increase schedule that shows the increment prior to lease renewal time, just make sure that it falls within rent regulations. Good Luck!!
I have done such deals. My partner and I about to close on a multi family with lower than market rents. What I have done is go in do improvements to the property. For example fix exterior especially deferred maintenance, new paint, spruce the common areas, new mailboxes. Then ask each tenant what are some of the issues in their unit. Of their list fix a few. I’ve replaced a stove in one unit, fridge in another. One tenant on a 6 plex wanted more shelves in per pantry. Then after giving each complex a facelift I’d go in raise rents by $30-60. Most tenants did not complain given they got something done to their unit as well as seeing new ownership update the complex.
Usually if rents are below market there is a reason. Old landlord did not reinvest into the place. Did raise rents because they didn’t want to deal with hassle of doing a make ready.
Just remember doing something to make tenants happy to their unit will get less push back on raised rents. Also can only raise rents if they are month to month not those on yearly leases. At least not til their leases come due.
@Bud Gaffney there is a lot of great advice in here and congrats on the 4 unit with a clear value-add! The one thing I would say given the timing, and as you already somewhat mentioned, is to try and keep them until early spring before you do anything. I’m not sure how it is in the area, but we experienced a definite slow down in tenant interest in our property in Chicago since it is colder now. It took us about a month and a half to find a tenant for one of our units that became vacant October 1st, and I’m sure it would be even harder now.
Depending on the leases if there are any or if they are month-to-month, we issued brand new leases when we bought our property in August that at least got the current tenants through March. If we decided not to renew their leases or increase rents and they moved, then we would have time to rehab the unit and/or release at a better time of the year.
Definitely agree with the other feedback of fixing up the exterior of the property and showing the new tenants you are going to be a quality landlord that cares about their well being. Having great relationships with your tenants makes life so much easier. Good luck and keep us updated on what you do!
@Luciano A. Thank you so much for this terrific insight! I am new to BP and still can’t believe the amount of knowledge here. Thanks again for providing value and helping me!!