Raising rents and feeling guilty??

Member since 2019 · 125 posts · 56 votes

Hey Everyone,

I hope i put this in the correct category.

I generally do not do yearly rent increases on my properties if the tenant is clean, pays on time, and is overall a good tenant. I might raise 2% every 2-3 years if my taxes/costs/insurance goes up but most of the time I'm generous. Currently, I'm in a little dilemma where I have to raise the rent drastically for my deal to work. I purchased a 6 Unit property in New Jersey. 3 Units are at $900/mo 2 units are at $450/mo and 1 unit is $750/mo. My current monthly income on the property is $4,350.00. It needs to be at $11-12,000.

The units are all 3 bedrooms 1 bath, and all in good condition. The rents for that type of apartment are currently around $2250/month. I need to raise them to at least $1850-$1950. The tenants that are paying $900 should not have any issues, but the 2 tenants i have that are at 450 and the one at $750 are going to have a heart attack when they see the new leases.

I really feel bad for them, some of them are older couples, but i don't have a choice.. Just putting this out there to see what you would do in this type of situation.

I will also offer to renovate their apartment, new kitchen, bathroom, flooring, and a paint job.

PS

The building is not rent-controlled.

Thanks

Dan

2 Reply

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Greg M.

Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes

Quote from @Daniel D.:

Rent needs to be raised because it is under market. Market rent doesn't care about what numbers you need to hit to be profitable.

The tenants know they are vastly underpaying. They're not stupid. They knew this day would come. They either can or can't afford the market rent. Bribing them with a renovation isn't going to make them feel better or suddenly allow them to afford it.

The reality is that you're probably going to lose all 6 tenants. Tell them all the new rent and when they all reply they can't afford it, give them the end date of their lease. Be fair, give them 90+ days and make it extremely clear that they need to start looking today, not day 89, as there will be no extension.

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Kim Meredith HamptonBusiness Member
Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes
3y
This is a problem I encounter all the time when myself or my investors are looking at a small multifamily; the current investor refuses or is lax in raising rents to avoid being the bad guy! In actuality, this helps no one.
The current tenants have heart failure when “you have to” raise rents, refinance, sell etc… and need those rents up to market, but because you have been the nice guy, it gets you nowhere. OR the problem is passed on to the next guy!
This scenario has been ever so difficult these past twelve months while rents have almost doubled in most places. Do yourself and make some sort of rent increase each year to help keep you at least somewhat close to market rents
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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
3y
Talk to them and give them notice. this is why it is important to increase rents regularly. The tenants and landlords get used to doing it.
Rents are below market value, but you also say you want to do major renos (new kitchens, bathrooms and flooring). Why do you need to do the major renos? Is it because there are problems (eg tub is failing) or it is because they are outdated?
Are the increased costs because of the renos?
4 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Kim Meredith Hampton:

This is a problem I encounter all the time when myself or my investors are looking at a small multifamily; the current investor refuses or is lax in raising rents to avoid being the bad guy! In actuality, this helps no one.
The current tenants have heart failure when “you have to” raise rents, refinance, sell etc… and need those rents up to market, but because you have been the nice guy, it gets you nowhere. OR the problem is passed on to the next guy!
This scenario has been ever so difficult these past twelve months while rents have almost doubled in most places. Do yourself and make some sort of rent increase each year to help keep you at least somewhat close to market rents

Its interesting, so the previous owner before I took over the building a few days ago hasn't raised rents since 1999. The good thing there for me is I got to purchase the building at a reasonable price because the rents were so low. The bad thing is now I have to deal with doubling, tripling, or quadrupling them!
1 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Theresa Harris:

Talk to them and give them notice. this is why it is important to increase rents regularly. The tenants and landlords get used to doing it.
Rents are below market value, but you also say you want to do major renos (new kitchens, bathrooms and flooring). Why do you need to do the major renos? Is it because there are problems (eg tub is failing) or it is because they are outdated?
Are the increased costs because of the renos?
I understand I bought the building with these rents. They have not been raised at all since 1999.

The increased rents are not because of the reno; the rents need to be raised so the property becomes profitable and cash flows. Because I'm increasing the rent drastically, I would like to offer the tenants a complete renovation of their unit, kitchen, bathroom, flooring, and paint. If they continue to stay and pay the new rent they at least get a brand-new renovated apartment. If they decide to leave, then I renovate it and rent it out anyways at market price.

I appreciate the replies.

Thanks
1 Reply
Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
3y
Quote from @Daniel D.:

Rent needs to be raised because it is under market. Market rent doesn't care about what numbers you need to hit to be profitable.
The tenants know they are vastly underpaying. They're not stupid. They knew this day would come. They either can or can't afford the market rent. Bribing them with a renovation isn't going to make them feel better or suddenly allow them to afford it.
The reality is that you're probably going to lose all 6 tenants. Tell them all the new rent and when they all reply they can't afford it, give them the end date of their lease. Be fair, give them 90+ days and make it extremely clear that they need to start looking today, not day 89, as there will be no extension.
16 Reply
Becca F.
Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
3y

@Daniel D.
Wow $450 and $750 are really low rents. You've been a nice landlord.
That is something I've struggled with also. My tenants are getting a very reasonable rent for out-of-state (Midwest) SFH rental. My property manager advised me that if I raise the rent too much it will scare them away - they've had the same rent for 2 years in a row but I'm planning to raise it the summer of 2023 when their lease is up, not sure if it will be 5%, 7% or 10%. My property taxes increased significantly and didn't pass it onto my tenants. My current rent is in the range of other rental comps but rent is going up across the country.
I agree with the other comments. Talk to them so they get advance notice. And raise your rent each year a little. Good luck and keep us posted!

2 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Greg M.:

Quote from @Daniel D.:

Rent needs to be raised because it is under market. Market rent doesn't care about what numbers you need to hit to be profitable.
The tenants know they are vastly underpaying. They're not stupid. They knew this day would come. They either can or can't afford the market rent. Bribing them with a renovation isn't going to make them feel better or suddenly allow them to afford it.
The reality is that you're probably going to lose all 6 tenants. Tell them all the new rent and when they all reply they can't afford it, give them the end date of their lease. Be fair, give them 90+ days and make it extremely clear that they need to start looking today, not day 89, as there will be no extension.

I understand they know their day will come when they must pay market rent. Some of them have been paying $400 since 1999... If some of them could afford the new rent, I believe that a renovation of their unit would make them feel a bit better. We are also renovating the exterior and interior of the building and adding a courtyard for tenants to hang out with a grill.
I believe 3 of them could pay the increased market rent, but 3 will most likely leave (hopefully) without any issues.
1 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Becca F.:

@Daniel D.
Wow $450 and $750 are really low rents. You've been a nice landlord.
That is something I've struggled with also. My tenants are getting a very reasonable rent for out-of-state (Midwest) SFH rental. My property manager advised me that if I raise the rent too much it will scare them away - they've had the same rent for 2 years in a row but I'm planning to raise it the summer of 2023 when their lease is up, not sure if it will be 5%, 7% or 10%. My property taxes increased significantly and didn't pass it onto my tenants. My current rent is in the range of other rental comps but rent is going up across the country.
I agree with the other comments. Talk to them so they get advance notice. And raise your rent each year a little. Good luck and keep us posted!

I purchased the building with these low rents. I am generous, but I would have never left it like this since 1999. After i get them up to market rents, i will do 2% increase every other year, depending on what is going on with the economy. I feel bad; some of these units are older couples that I know will be crippled when I give them the new rent.
1 Reply
Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
3y
Quote from @Daniel D.:

I'm sorry, but listen to yourself. Dear Tenant, I'm doubling-to-quintupling your rent, but you'll now have a grill to cook whatever food the food bank has for you this week. If the tenants valued a grill, courtyard, and shiny exterior that much, they'd have moved to a building with that years ago. They value cheap rent.

It's clear that you're having a difficult emotional time regarding this. That's fine and normal, but this is a business. There is no amount of renovation that will make this increase palatable to the tenants. Raising rents 10% or 15% and making improvements is one thing. Doubling rent and making improvements is another.

And as for feeling bad about the older tenants, do you think they ever once had a conservation about if the landlord was doing OK financially and if they should be paying him more? They don't give a s**t about the landlord, you or the prior one, and wouldn't give you a dime to help you financially if you were in need. And that might sound super cold, but it's the truth and you know it.
10 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Greg M.:

Quote from @Daniel D.:

I'm sorry, but listen to yourself. Dear Tenant, I'm doubling-to-quintupling your rent, but you'll now have a grill to cook whatever food the food bank has for you this week. If the tenants valued a grill, courtyard, and shiny exterior that much, they'd have moved to a building with that years ago. They value cheap rent.

It's clear that you're having a difficult emotional time regarding this. That's fine and normal, but this is a business. There is no amount of renovation that will make this increase palatable to the tenants. Raising rents 10% or 15% and making improvements is one thing. Doubling rent and making improvements is another.

And as for feeling bad about the older tenants, do you think they ever once had a conservation about if the landlord was doing OK financially and if they should be paying him more? They don't give a s**t about the landlord, you or the prior one, and wouldn't give you a dime to help you financially if you were in need. And that might sound super cold, but it's the truth and you know it.

Needed this :). Thanks, and i completely understand your point.
2 Reply
Shawn McenteerBusiness Member
Realtor · Boonton Township, NJ · Member since 2013 · 2k+ posts · 1k+ votes
3y
I raised rent $500/per month on one duplex this past year, my tenants texted me a few weeks back thanking me for the opportunity to live in the property. They appreciate it and it meets their needs perfectly. I have another set of tenants that have seen 100-200 per month increase each year for the past 3 years, they also are very appreciative. Very simply put I do not predict tax increases, capx, and many other unkowns. For example just imagine having to repair something with lumber when prices were at its peak. Raising rent is like running a successful business, you need to make profit. Tenants understand its part of the process.
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Richard F.
Honolulu, HI · Member since 2008 · 3k+ posts · 2k+ votes
3y
Aloha,

I have had numerous Clients that insisted on keeping the rent below market specifically to "help" the tenants. On multiple occasions, after 8, 10, 12 years the tenant gave notice they were moving...into the brand new home they just bought with all the money they saved thanks to low rents. Every one of them had a new car within the year also. Every one of the vacated units needed complete renovation, not from tenant damage, but simply because of age and normal deterioration. That represents a lot of money out of the Owner's pockets just for being "nice".

You need to determine your business model, and stick with it. If you truly want to treat your (long term) rentals as a business, you will re-evaluate the property condition every year with an appropriate inspection, inside and out; you will re-evaluate the rental market to determine if an increase is reasonable (whatever is happening "across the country" might be an indicator, but every market is different and that is what you need to study in the moment), and inquire of the tenants long term plans; you should be performing regular preventative maintenance to prolong the life of certain elements and catch problems (especially water related) early. You should also establish reserves so you have funding ready when elements need major repair or replacement.

When you buy a property that is so much under market, for many years, I can virtually guarantee it needs significant renovation. The only reasonable way to do so is to vacate the units...either all at once, or work out a schedule that would mesh with existing longer term rental agreements in place. If the tenants are interested, you can also offer the opportunity to "hop scotch" the schedule, moving out the tenants that will not be offered, or that decline, the opportunity, so those units can be renovated. Then permanently (or temporarily) allow the tenants you will be keeping to move over to those finished units while their original unit gets renovated. They can remain in the new unit or move back to their original. This keeps a good percentage of income coming in; you keep the most promising old tenants; and you have newly updated units that will quickly rent as soon as they are completed on the back end of the project. You give existing tenants a slight reduction in rent for the inconvenience, with the understanding that it will be "stepped" back up to your projected market rate within 12 - 18 months of completion.
4 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
@Shawn Mcenteer
That is correct, i appreciate the comment.
0 Reply
Mark F.
Rental Property Investor · Northern NJ · Member since 2019 · 672 posts · 677 votes
3y
Daniel are you in Northern NJ? I am as well and would love to own a 6 unit some day (own two duplexes). I have to do the same, raise rents on some tenants, but the rents were not that depressed. Good luck and I hope the rent raising goes well. Listen to Greg!
2 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
@Richard F.
This is a very good analogy, thank you.
0 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
@Mark F.
Greg does have some points!
Yes im in North NJ. I own a decent amount of rental properties, this is is my first one that i purchased with rents this low.
0 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
If you're hesitant to do this someone else will. As an investor you want to make the most you can while being reasonable, it's tough but has to be done.
3 Reply
Gary L Wallman
Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes
3y
Quote from @Daniel D.:

Hey Everyone,

I hope i put this in the correct category.

I generally do not do yearly rent increases on my properties if the tenant is clean, pays on time, and is overall a good tenant. I might raise 2% every 2-3 years if my taxes/costs/insurance goes up but most of the time I'm generous. Currently, I'm in a little dilemma where I have to raise the rent drastically for my deal to work. I purchased a 6 Unit property in New Jersey. 3 Units are at $900/mo 2 units are at $450/mo and 1 unit is $750/mo. My current monthly income on the property is $4,350.00. It needs to be at $11-12,000.

The units are all 3 bedrooms 1 bath, and all in good condition. The rents for that type of apartment are currently around $2250/month. I need to raise them to at least $1850-$1950. The tenants that are paying $900 should not have any issues, but the 2 tenants i have that are at 450 and the one at $750 are going to have a heart attack when they see the new leases.

I really feel bad for them, some of them are older couples, but i don't have a choice.. Just putting this out there to see what you would do in this type of situation.

I will also offer to renovate their apartment, new kitchen, bathroom, flooring, and a paint job.

PS

The building is not rent-controlled.

Thanks

Dan

Dan,
It seems the previous owner was much like you. Didn't like raising rents on "good" tenants. In my opinion, a good tenant is one who pays market rent in addition to taking care of my property. I believe landlords who don't raise rents to market value on a timely basis are doing a great disservice to their renters. This disservice is amplified when a property changes ownership and the new property owner is forced by economics to raise rents by a large amount.
If the previous owner was conscientious in keeping up with past rent increases, your tenants would not be running for the hills when you advise them of their new rents.
Respectfully,
Gary
4 Reply
Curtis Mears
Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes
3y

First question, how does going from 900 to 1900 not an issue for anyone? That being said, you need to raise the rents to market. I would not take small steps as even raising 500 per month will probably not work, so do it and get it over with. I would not explain to the tenants, I would send my usual renewal with rent increase email. If the tenants get upset, then I would explain how they have been getting a huge discount for how many years. It will be interesting how they take it, because my guess is they will not find any rents close to where they are now. So expect them to be difficult as they will be in a bad situation.

I raise rents every year, but generally only by 25 to 50 per month. The exception is this last year as rents skyrocketed so I am raising them by 100.
3 Reply
John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
3y

I've bought 8 or 9 SFR that came with tenants paying WAY below market rent. The previous landlords probably did fine since they bought those properties years/decades ago for cheap. However, when we invest in these properties, our numbers need to work. And these properties have value based on the current market. The low paying tenants get screwed and most can't afford to stay. I've kept almost all of my inherited tenants and have raised rent fairly aggressively over the two or three years they've been there. Not right away. I renovate their places right away a little. And over time, I keep updating them so they see a value of their rent being jacked doing. We're not running a charity. We need to make a return on our big investment. But we're affecting low/fixed income peoples lives.
4 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3y
Quote from @Daniel D.:

I might raise 2% every 2-3 years if my taxes/costs/insurance goes up but most of the time I'm generous. Currently, I'm in a little dilemma where I have to raise the rent drastically for my deal to work. I purchased a 6 Unit property in New Jersey. 3 Units are at $900/mo 2 units are at $450/mo and 1 unit is $750/mo. My current monthly income on the property is $4,350.00. It needs to be at $11-12,000.

The units are all 3 bedrooms 1 bath, and all in good condition. The rents for that type of apartment are currently around $2250/month. I need to raise them to at least $1850-$1950. The tenants that are paying $900 should not have any issues, but the 2 tenants i have that are at 450 and the one at $750 are going to have a heart attack when they see the new leases.

I really feel bad for them, some of them are older couples, but i don't have a choice.. Just putting this out there to see what you would do in this type of situation.

I appreciate your compassion and have the same. I'll reply as a seller of 18 units last year where my prior tenants experienced massive rent increases when the new owners came in.

For at least half, it was a good thing. The huge raise forced them to make decisions that will benefit them more long-term. 2 moved back home to save money to buy next year and 2 moved in with their SO, also saving them $.

A couple others we moved in to some of our other units and the ones that consolidated to save $ will be on our preferred buyers list as we continue to reduce by 1 to 2 rentals per year. Seeing our prior tenants as first time buyers and househackers will be fulfilling indeed.

Some of your tenants will be forced to make decisions that drastically improve their future by these raises. Remember that.

4 Reply
Christopher Stout
Investor · NY · Member since 2021 · 7 posts · 4 votes
3y
I have experienced this emotion many times. More so in the beginning of my career. The rental business, for some reason, is treated differently than most. Almost no other business has owners who “feel bad” for raising their prices to ensure they can maintain a profitable business. I believe that every year that is behind the tenant that they paid less then market is a gift.
We are in business. A serious business with a lot of money on the line. In our case, its OPM. We must run our businesses as efficiently as possible. With this being said, you also must make good judgment on making sure you don’t raise rents too quickly where you'll have a huge Cap-ex bill or large vacancy problem. Its a total balancing act and it what makes you a good operator or poor operator. Good luck.
1 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Eliott Elias:

If you're hesitant to do this someone else will. As an investor you want to make the most you can while being reasonable, it's tough but has to be done.

Understood, they know they have been paying $400 a month for 23 years, I think that should be enough. I believe many of them will stay because there aren't any apartments in the area that would be cheaper, even with me raising the rents, especially now.
0 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Gary L Wallman:

Quote from @Daniel D.:

Hey Everyone,

I hope i put this in the correct category.

I generally do not do yearly rent increases on my properties if the tenant is clean, pays on time, and is overall a good tenant. I might raise 2% every 2-3 years if my taxes/costs/insurance goes up but most of the time I'm generous. Currently, I'm in a little dilemma where I have to raise the rent drastically for my deal to work. I purchased a 6 Unit property in New Jersey. 3 Units are at $900/mo 2 units are at $450/mo and 1 unit is $750/mo. My current monthly income on the property is $4,350.00. It needs to be at $11-12,000.

The units are all 3 bedrooms 1 bath, and all in good condition. The rents for that type of apartment are currently around $2250/month. I need to raise them to at least $1850-$1950. The tenants that are paying $900 should not have any issues, but the 2 tenants i have that are at 450 and the one at $750 are going to have a heart attack when they see the new leases.

I really feel bad for them, some of them are older couples, but i don't have a choice.. Just putting this out there to see what you would do in this type of situation.

I will also offer to renovate their apartment, new kitchen, bathroom, flooring, and a paint job.

PS

The building is not rent-controlled.

Thanks

Dan

Dan,
It seems the previous owner was much like you. Didn't like raising rents on "good" tenants. In my opinion, a good tenant is one who pays market rent in addition to taking care of my property. I believe landlords who don't raise rents to market value on a timely basis are doing a great disservice to their renters. This disservice is amplified when a property changes ownership and the new property owner is forced by economics to raise rents by a large amount.
If the previous owner was conscientious in keeping up with past rent increases, your tenants would not be running for the hills when you advise them of their new rents.
Respectfully,
Gary
I hear ya! It's not that I don't like raising rent, I try to increase them at a minimum when needed. This guy never raised them... not even a dollar. Their security deposit over the course of 20 years is more significant than their rent LOL.
0 Reply
Daniel D.
OP
Member since 2019 · 125 posts · 56 votes
3y
Quote from @Curtis Mears:

First question, how does going from 900 to 1900 not an issue for anyone? That being said, you need to raise the rents to market. I would not take small steps as even raising 500 per month will probably not work, so do it and get it over with. I would not explain to the tenants, I would send my usual renewal with rent increase email. If the tenants get upset, then I would explain how they have been getting a huge discount for how many years. It will be interesting how they take it, because my guess is they will not find any rents close to where they are now. So expect them to be difficult as they will be in a bad situation.
I raise rents every year, but generally only by 25 to 50 per month. The exception is this last year as rents skyrocketed so I am raising them by 100.

I understand, this thread cleared up a few things for me. They know they have been taking advantage of the owner for many years. I have to renovate their units if they leave and I decide to get someone else. If they rather stay (with increased rent) and I renovate the apartment for them, I think that's a win-win for everyone.

Thanks

Dan

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