Raising Rent for Long Term Tenants After Purchasing Property

Raising Rent for Long Term Tenants After Purchasing Property

Member since 2021 · 5 posts · 8 votes

Hello! My wife and I are in contract for our first rental property, a triplex! The current owner has had it for 21 years and is older so rents have not increased over time. The current tenants are being charged $425 while the fair rental value for the area is about $600. Two tenants have been there for 7 years and we would like to keep all three. We plan to make improvements to the property to make it more enjoyable for them to live there, but we will not completely renovate the units unless a tenant moves out. So I feel it is appropriate to raise the rent at least a little. To do this ethically, we were thinking we would tell them in January that we would be making improvements in the spring and raising the rent to $500. They are month to month currently so in the spring if they agreed, they would sign a one-year lease. Then the year after, raise it to $550 and repeat until at fair value. 

Is this a good way to do this or is there a better way? I am not sure if this way of doing it is a good idea and would love to hear the communities feedback. Thanks!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
4y

This question is asked at least once a day.

If you give raises in small doses, there are multiple problems:

  1. Confusion about when increases take place, tenant pays the old rent instead of the new, etc.
  2. Tenant may eventually be unable to afford the increased rent, resulting in termination or they stop paying rent
  3. Tenants are likely to resent you for not leaving things the way they were.

My recommendations:

  1. My primary preference is to move out the current renters, improve the units, then rent at market rate to tenants you've screened and placed under your lease. This ensures you have complete control of the situation and can "train" the tenants instead of trying to correct what the past Landlord did.
  2. If you insist on trying to keep the current tenants, my recommendation is to give them notice of the rent increase and new lease. They can accept it or move on. I recommend no more than 60 days for them to accept or find a new place, but check your state laws first.
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  • Real Estate Agent · Denver, CO · Member since 2019 · 161 posts · 176 votes
    4y

    @Kyle Mullins I think this is a fair way to do it. If they do not agree to the new terms, raise the rents to market value and find new tenants. Look at the rental demand in your area and post on Facebook groups to see what type of tenants you are attracting. Just make sure you screen them well. Nice work getting a triplex!!

  • Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    4y

    @Kyle Mullins


    Fair and ethical double Dutch rudder for days...

    What you're really asking is, how do I get my tenants to do what is easiest and most profitable for me? How I do I get them to stay in place and not move out while significantly raising the rent on them and ensuring that they pay?

    "We plan to make improvements in the spring..." I'm sure you have no doubt that you have the best of eventual intentions, but your new tenants don't know you. What they do know is that their new owner came in with a bunch of promises and no action, and immediately hit them with a fat 17.64% rent increase.

    You're going to get pushback with your plan. From the outside looking in, it sounds VERY manipulative. You at least need to do something in good faith BEFORE you raise the rent. You can't ask these people to trust a stranger's word of honor, especially a young, admittedly inexperienced stranger who owns the roof over their head.

    If you don't agree with me, then at least do what @Bryan Balducki says. Give 'em some old-fashioned coathanger love an' git yo' money. They'll respect you more in the morning.

  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    4y

    @Kyle Mullins

    You will need to consider by raising rents you may have the tenants leave.  Are you prepared to have vacancies and then fix up the units?  There is a cost to replacing tenants and then the cost of rehabbing the unit(s).  It may be the better option to make some improvements and then raise the rent nominally.  When I take over a building I have the tenants fill out my application.  You may find the tenants can’t afford your increase. 

    Market rent is important to your cash flow, but so are vacancies.  If the tenant leaves and the cost to update is $10,000 (haven’t been updated for years) plus the vacancy you will need to do the math.  60 days to rehab plus the vacancy.  Might cost $12,000.  Raising rent to 600 is an extra $175 a month.  It will take 6 years to recoup your money.  Keeping tenants has a value even if the rent is under market.  Raise the rent $25 a year might be the better move.  Incremental adjustments.

    Just some things to consider.

  • Rental Property Investor · Russellville, AR · Member since 2014 · 684 posts · 509 votes
    4y

    Your plan is fine if vacancy isn't an issue.  If it is, then make some small improvements before a rent increase is ever mentioned.  Actions speak louder than words!

  • Member since 2021 · 5 posts · 8 votes
    4y

    I guess I was not clear, the plan has always been to make the improvements first before raising rent. I definitely am going to take what you said @Jim K. and think about the amount. Your comments combined with how @Kenneth Garrett broke it down gives us some thinking to do. These comments and guidance are exactly why I asked the question here. Keep it coming!

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    This question is asked at least once a day.

    If you give raises in small doses, there are multiple problems:

    1. Confusion about when increases take place, tenant pays the old rent instead of the new, etc.
    2. Tenant may eventually be unable to afford the increased rent, resulting in termination or they stop paying rent
    3. Tenants are likely to resent you for not leaving things the way they were.

    My recommendations:

    1. My primary preference is to move out the current renters, improve the units, then rent at market rate to tenants you've screened and placed under your lease. This ensures you have complete control of the situation and can "train" the tenants instead of trying to correct what the past Landlord did.
    2. If you insist on trying to keep the current tenants, my recommendation is to give them notice of the rent increase and new lease. They can accept it or move on. I recommend no more than 60 days for them to accept or find a new place, but check your state laws first.
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  • Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    4y

    @Kyle Mullins Common dilemma for newer rental property owners, "Listen to your heart or listen to your business plan?" The fact that they've been there for 7 years should have no influence on the business plan, but is simply a reason to "not raise" rents to be "fair" and kind. Nothing wrong with this, yet it won't help your investment as much.

    I agree with @Nathan Gesner recommendations. Spot on. Training tenants rarely works out if the last landlord wasn't like you. Which chances are they weren't as rents are below market!

    Yet if you are of a kind heart, give them notice of new rents to be instituted at X date, allow those to leave who leave. I assure you some will. This frees up a unit, which you can renovate, raise rent and then allow a tenant to move into, thus not displacing them or raising rent without value. They get a new unit, at the new rent which makes it "fair". 

  • Ben HanveltPro Member
    Investor · Mikana, WI · Member since 2014 · 13 posts · 12 votes
    4y

    Raising rents on tenants is hard, worrying about if they'll move out, can they afford it, how will they feel etc.  Feel free to tell me I'm wrong here but if I pay fair market value for the property, I don't feel it is wrong for me to ask for fair market value rents.  I agree with @Nathan Gesner that new tenants will give you the least amount of pushback.  The former owner likely had a far smaller mortgage payment and probably a lower tax assessment than you do so they were able to keep rents low while making good cashflow with little to no worry of unit turnover.

  • Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    I think you are more or less on the right track. They know they are under market and they know its coming.  I would meet with them to go over your lease and give them the rental increase. I would also tell them you are doing it gradually and in stages out of consideration for their good long term tenancy. You want them to have time to budget and to plan. 

    Definitely separate this from any rehab, you don't want to make it sound like its a quid pro-quo that you are making it nicer because they will try and balk "oh I don't need a new stove, etc. just keep the rent the same." Nope. You are executing a plan not asking for permission.

    One thing I have said with holdover tenants that has often gone over surprisingly well is "in any good business relationship both parties are doing well". You are too far under market right now for me to do well. I don't need to lead the market but I need to be at least competitive. The new rent will be X"

    Whatever you do, do it right off the bat. Good luck

  • Real Estate Broker · Spring, TX · Member since 2016 · 20 posts · 12 votes
    4y

    Seems reasonable but giving existing tenants so much advance notice of a rent increase can put you at a disadvantage and set a tone for bad feelings. They may begin their process of moving.  Suggest you raise rents $25 or $50/mo to start now, explaining you're still below market and ask them what improvements they would most like to see. you need not do any of those they suggest, but you'll better understand your clientele and it'll get them more invested in staying put.  make the improvements you've planned in the spring as mentioned. be sure to follow through so you gain a good reputation as a desirable landlord.  begin now with setting up a waiting list of prospective tenants to quickly fill the vacancy if your current tenants move.  bear in mind, it's expensive to move. likely cheaper for your current tenants to stay put since they'll have to pay market rent elsewhere and pay the cost of moving and resettling.  sound like your proposed rent may be below market so if they move because of your modest rent increase, they were going to move anyway. i work with my tenants always and they completely understand that as my expenses go up, their rent will also rise. in the end, it's a business and respecting your tenants by sharing relevant information helps them understand it's not greed, just good business and they'll see that their rental costs are the same or more elsewhere.  great job getting that tri-plex!  

  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    I would vote for doing the improvements now and then quickly raising rents to market value...or close to it. Maybe go to $550 mo at first and then make up the difference next year. 1) Be clear about your intentions, 2) be honest and 3) be strong.

    You did not start this business to be ethical. You should already be ethical. You need to make a business decision, not an an ethical one. If you do the 3 above, you will be fine.

    Hold yourself accountable and hold your tenants accountable. Why should they get a 30% break?

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    $50 below market means you are losing $600 per year, per unit. That's equivalent to a month of vacancy. You need to think like a business person if you want to build a business.

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  • Member since 2018 · 13 posts · 10 votes
    4y

    @Kyle Mullins

    This is a problem that’s easy to get lost in ethics vs business plan. The fact of the matter is that with the transfer of the building, you have improvements to make, you’re making a larger mortgage payment than the previous owner, taxes are higher than when they moved in, and inflation has increased all costs across the board. I understand having a heart, but your costs are higher than the value that they first started paying rent at, so their costs can ethically go up too. It’s simple business.

    I figure out what market rent should be, then make it clear that I’m charging less than a new tenant off the street would be paying. If market rate is $550, I wouldn’t raise it to $500, I’d raise it to $495, it doesn’t make a big difference to you, but it sounds like it does to them.

    We closed on a three unit mixed use building this past March, our third building. Right from the start, we made it clear that we wanted to make improvements, we always do common area improvements immediately. Every time we communicate with tenants, I ask how everything is and if anything needs improvements. Rents at this building were $375, $375, $275. We raised them to $520, $520, $625. The commercial store front at $625 moved out, and it’s ok. Automatically with our tenants, we raise the rent 3.25% per year, at the time of lease renewal. If I were inexperienced, I would increase rents one at a time, starting with the person I want in the building the least. To avoid multiple vacancies

    Walmart raises their prices without warning or remorse, that’s how capitalism and market rate works, it’s just facts. When your costs go up, so do theirs.

    We have a letter that’s nearly a page long we send to tenants for rental increase, I’d happily send it to you if you message me. Also, one that we send when taking over the building to give them an idea of what to expect.

  • Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    speaking of business, how do you want to compete? "market rate" isn't a number its a range. The range is different for a newly refreshed unit in prime time vs. a tired one in january or whatever off season, etc. So don't get stuck on a particular number. 

    What is your position? Cheapest? Nicest? Best location? Features? If you are at the low end, you aren't that far away. An increase of $50-75 now and $25-50 next year gets you there. If high end, maybe bite the bullet now at once with an appropriate transition period. How much do YOU value the tenancy?.

  • Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    4y

    One other thing I'd like to point out is that this is your first property. You're not in the same position as the guy with 20 units, or the guy with 200. So when people tell you to "run your business like a business," understand that it means different things to different people. The CEO of Coca-Cola does not pour out every drink of his product to every customer. The CEO of Red Bull does not commission massive national Christmas ad campaigns. The kid selling lemonade at a sidewalk stand in his parent's front yard does not sponsor daredevils to go to space in balloons so they can skydive back to earth. They're all in the flavored-water business, though.

  • Member since 2021 · 5 posts · 8 votes
    4y

    Thank you all for your responses. My wife and I have been reading is discussing all of them. I think what we have decided is we will raise rents by only $25 for each tenant and ask them to sign a 1 year lease. Then spend the year making improvements and showing them  that we will be the best landlords they will ever have. Then next year do another $25. Building a strong base now and the money will come later. If anyone decides to move on later, then we will be prepared for a full Reno for that unit. 

    Additional question though, when should we present the lease? I like what @Kenneth Garrett said about having new tenants fill out the application. This will help us understand our tenants situation better, as well as actually meeting them and getting to know them. Would we present it after that? Or should we let them go month to month for a while longer and present it later? Seems simple enough to just present it the month following closing but you all seem to have some good insights. 

  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y

    So you basically just disregarded the bulk of the opinions you got from experienced investors......?

    Only $25 AND a 1 year lease?

    Good thinking, you'll do well......

  • Los Angeles, CA · Member since 2021 · 20 posts · 34 votes
    4y

    @Kyle Mullins

    Yeah raising rents & making improvements are two separate issues entirely and should never be conditional to one another. Obviously, if the property has deferred maintenance, that should be addressed ASAP. As far as updates or remodeling, that can be done between tenants. 2nd, you are inheriting those tenants, you didn’t rent to them so they really aren’t your renters. so as the new owner, you really didn’t establish the terms of tenancy as you see fit, therefore you don’t owe them anything going forward. However, making an effort to be a fair landlord is always a good idea. Sometimes some tenants will confuse your kindness as a weakness & try & take advantage of that.

  • Rental Property Investor · Rocky Hill, CT · Member since 2019 · 42 posts · 20 votes
    4y

    @Spencer Gartz Spencer, I would be interested in seeing both of those letters that you mentioned. Do you mind sending them to me?

  • Los Angeles, CA · Member since 2021 · 20 posts · 34 votes
    4y

    @Kyle Mullins

    First of all, regarding leases, once you take possession of the property, you inherit tenants that don’t have any written agreement with you. They really don’t owe you any rent because they have never signed an agreement with you, whether it be a lease or month to month. You don’t even have a rental application. All you know is where they live, period. It is ABSOLUTELY NECESSARY that once you take legal title to the property, you MUST have them fill out a new updated rental application and you must have ALL OF THEM sign a new rental agreement WITH YOU. Or at least an addendum to their existing agreement denoting that they now pay their rent to you. And while you’re at it, don’t be afraid to inform them of their new rental amount. And if they can’t afford market rent, it’s better to get them out sooner than later. That’s the difference between buying rental property and making good investments…

  • Rental Property Investor · Savannah, GA · Member since 2014 · 298 posts · 67 votes
    4y

    Your new projected rent sounds super low.  Where is this, and when can I move in?  Just kidding.  But seriously, why so low? A couple of things - check your state landlord-tenant laws with regard to how much you can raise rents.  Some states restrict the amount or percentage that you can raise rents, and others do not.  Don't be afraid to push your rent a bit, even if you risk losing long-term tenants.  You have to run it like a business. Of course, give your tenants plenty of notice, especially if there will be a significant increase.  Let them know that their new lease, should they decide to stay another year, will be at x amount, and you would love to have them stay.  You don't have to justify it, just state it as a fact.  Rents have risen dramatically nationwide recently.  Everyone knows that. Good luck!

  • Rental Property Investor · Savannah, GA · Member since 2014 · 298 posts · 67 votes
    4y

    Also of course you must honor their current leases until they expire.  That is the law.

  • Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    4y

    @Kyle Mullins yea, gotta say I think you are choosing the worst of all possible worlds here. Even, perhaps especially, if you want to go somewhat gradual with increases you never have a better time for a big adjustment towards market than the beginning.

    They aren't going to thank you for the increase even at $25 and making them fill out an application is insulting. You may not find it so, they will, guaranteed. Now you have created some hostility and you still haven't moved much in the direction you want.  And you lock yourself into that low rate for a year and commit to them. 

    By the way, you think that doing improvements will make them happy? Well, maybe, but another way to look at it is you will be around a lot (never good) and disrupting their lives, all for improvements they haven't asked for and didn't want to pay for necessarily. Don't be surprised when you don't get a lot of goodwill. I am not saying don't do it, but don't expect them to look at it the way you do. It doesn't mean they are bad tenants, its just that your incentives aren't as aligned as you think. 

    Seems to me you are throwing away the advantage of a long term tenancy and embracing the problems associated with it.

  • Los Angeles, CA · Member since 2021 · 20 posts · 34 votes
    4y

    @Kim Banks

    Yes. Which is exactly why you get a brand new application & lease/rental agreement from the beginning so that they’re renting on your terms, not someone else’s who’s no longer involved in the transaction.

  • Member since 2021 · 5 posts · 8 votes
    4y

    Well based on the new responses I feel like maybe we haven’t made the right decision. On one hand I want to run this well, but on another I never want to be the reason someone is displaced. I guess that is going to be a challenge in this business. We will think about this more, thanks everyone!

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