Raising the Rent on Long Term Inherited Tenant

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Raising the Rent on Long Term Inherited Tenant

Frank Jennings
Investor · Pittsburgh · Member since 2018 · 34 posts · 13 votes

I purchased a duplex 1.5 years ago. We did some rehab which involved new brick work on the exterior and a new deck. This was so we could replace garage door lintels, which was mandated by the borough. This was paid for by the seller as a price reduction and done by me after the sale.

I told the tenants the price was going to go up due to this rehab. Even though I essentially didn't pay for it just overseeing it was a lot of work and I felt that the property was worth more rent afterwards anyways. Then one tenant moved out and I told the other tenant that we would let the market decide how much the new rent should be.

The tenant is paying $860 a month and it looks like I'm going to get $1100 a month on the other side. Both sides are basically the same except I put some new baseboards down and fresh paint on the vacant side living/dining room.

I just don't know exactly what to charge for the remaining tenant's rent. The tenant always pays on time and never has parties and is very quiet. Model behavior.

But what is fair to him, me, and the new tenant???? I honestly don't know what would be fair everybody. I would appreciate your thoughts and if you have direct experience even better!! Thank you!

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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
4y
Quote from @Frank Jennings:

Could I raise it by $125/month 2 years in a row instead of $250/month at 1 time? Is that unfair to the other tenant and do I get into an unfair housing situation then? 

Do not do this. The tenant either can/can't afford the market rate. If they can pay market, you just screwed yourself out of money by underpricing it the first year. If they can't pay market, you just screwed yourself out of money by underpricing it the first year and the tenant left.

Given they are a good tenant and there would be turnover cost, I'd probably price it $1025-$1050.

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  • Donna M.
    Member since 2020 · 81 posts · 73 votes
    4y

    I would make the rent on both units the same, $1,100.00 which is at market. 

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    If both are the same, then they should rent for the same.  Given their side doesn't have new paint, you could charge a bit less, but their rent will still go up substantially.  At the end of the day, it is your call.  Vacancies cost and good tenants are nice to have.  

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y
    Quote from @Frank Jennings:

    Go to the grocery store and look at the milk. Is it all priced the same, or is the milk from three days ago priced lower? It's all the same! The market dictates what something is worth and that's what you should charge. If your rental is worth $1,100 then that is what you should charge for it. That's fair. Your insurance company doesn't consider your feelings when they bump your rates; they just charge you market rate and expect you to pay it or move on. Same with taxes. Same with gas and dog food and your local mechanic. If you try to charge $1,400 and the market only supports $1,100 then you'll quickly learn that $1,400 is unfair. It's that easy.

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  • Frank Jennings
    OP
    Investor · Pittsburgh · Member since 2018 · 34 posts · 13 votes
    4y

    I guess I was thinking that raising the guy's rent by 28% in one shot would be rough on him. And I know he has the right to leave if he wants. Could I raise it by $125/month 2 years in a row instead of $250/month at 1 time? Is that unfair to the other tenant and do I get into an unfair housing situation then? 

    0Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y
    Quote from @Nathan Gesner:
    Quote from @Frank Jennings:

    Go to the grocery store and look at the milk. Is it all priced the same, or is the milk from three days ago priced lower? It's all the same! The market dictates what something is worth and that's what you should charge. If your rental is worth $1,100 then that is what you should charge for it. That's fair. Your insurance company doesn't consider your feelings when they bump your rates; they just charge you market rate and expect you to pay it or move on. Same with taxes. Same with gas and dog food and your local mechanic. If you try to charge $1,400 and the market only supports $1,100 then you'll quickly learn that $1,400 is unfair. It's that easy.


     HA. I do see convenience store sushi discounted after several days. 

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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    4y

    @Frank Jennings, I have a couple thoughts on the subject.

    First, how did you determine market rent?!? A lot of landlords look at the rental listings that are similar to those and see what the most they are consistently asking. Asking isn't always getting, sometimes landlords are reducing their price to get a tenant. Also, even getting a tenant doesn't make it market rate because maybe the tenant isn't very well qualified. THEN, even if you get a well qualified tenant that still may not be market rate because they might not stay very long!

    I budget 5% for vacancy. So, with the average time it takes me to do a turnover, I want a tenant to stay at least 2 years. So, if you are charging so much that half your tenants stay 1 year and half stay 2 years then you are losing MORE than budgeted to vacancy. If you can lower rent and keep tenants longer that might actually make you MORE money with LESS work!

    Second, for dealing with an existing tenant, its hard for people to adjust to sudden changes in their budget. So, my approach where rent is well under what I consider market rent is to raise rent slowly over years to catch up with the market. My normal rent increases are 1-3%. In the long run rent likely will only go up 1-2%. So, if you raise it 3% or a little more yearly you will eventually catch up to where rent should be. If you get a turnover, that is a good time to bump rent up directly to market rent. I would probably never raise rent more than 5-7% on an existing tenant.

    So, in your situation, I would probably be bumping rent something like $30-60 per year for a few years. 

    0Reply
  • Greg M.
    Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
    4y
    Quote from @Frank Jennings:

    Could I raise it by $125/month 2 years in a row instead of $250/month at 1 time? Is that unfair to the other tenant and do I get into an unfair housing situation then? 

    Do not do this. The tenant either can/can't afford the market rate. If they can pay market, you just screwed yourself out of money by underpricing it the first year. If they can't pay market, you just screwed yourself out of money by underpricing it the first year and the tenant left.

    Given they are a good tenant and there would be turnover cost, I'd probably price it $1025-$1050.

    1Reply
  • Alex Talcott
    Attorney · Durham, NH · Member since 2019 · 292 posts · 126 votes
    4y

    There's often unpleasantness when too-low rents have lulled tenants into a distorted sense of

    a) the market

    b) implied cost of regular maintenance

    c) healthy living conditions

    d) the imperative of growing income, managing spending

    0Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    4y

    If a tenant is more than 15% below market, I recommend termination. 

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

    Mmm... Gas station sushi!

    Its discounted because it's losing value compared to the fresh sushi, just like a delapidated house loses value when compared to a renovated house. 

    And both can make you sick. 

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