Raising rents and feeling guilty??

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Raising rents and feeling guilty??

Daniel D.
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

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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. 

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  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @John Morgan:

    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.

     This pretty much sums it up! I have no choice, feeling guilty or not, it HAS to be done. 

    1Reply
  • Mark F.
    Rental Property Investor · Northern NJ · Member since 2019 · 673 posts · 677 votes
    3y
    Quote from @Daniel D.:

    @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.


    Sent you a PM, would love to connect.
    0Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Steve Vaughan:
    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.

    This one hit home. If you didn't mention it, I wouldn't have remembered. 8 years ago, I was kicked out of my 3 bedroom apartment with small kids and my wife because a developer purchased it and was knocking the building down to build something bigger. At that time, it seemed like the worst few months of my life, trying to find a place to live, kids, schools etc. Because of that situation, I purchased a house with an FHA loan for $290k, and sold it a few years later for $700k. That property got me into real estate investing, and the rest is history. If I wasn't forcefully kicked out of that apartment, I would probably not be posting about this 6 unit now...

    @Steve Vaughan

    1Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Christopher Stout:

    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. 


     Understood. The huge cap-ex bill is figured into my figures, so i have no issues with that. Even with empty apartments, they can be rented VERY quickly in the area where this property is because there is NOTHING available. It takes months to find a place to live.. 

    0Reply
  • Jeff Moore
    Real Estate Agent · PCB/30A Florida and St. Thomas USVI · Member since 2015 · 36 posts · 18 votes
    3y
    I have some great tenants in a unit and last year was the first time I raised their rent in 3 years. I felt bad about doing and kept putting off the phone call. When I finally did it they said "we understand, we have been expecting this call for like two years". So if you do it little by little they wont mind.
    1Reply
  • Edwin De leon
    Investor · bronx, NY · Member since 2008 · 265 posts · 42 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


     Daniel, I would feel the same guilt if I were in your position, you know what you have to do, feel the guilt, the feelings and do what you need to do, this is a business for you and not non-profit helping the less unfortunate. Got great feedback from everyone, if it would make you feel better, find some thing that you can do for them that you do not have too, like maybe paying for their moving cost, etccc if you got the capital to do so, if not maybe something else that will make you feel a little better, the emotions you are feeling means you are a considerate person, not a cold blooded shark, it's ok you are actually a human being who cares, but this will not get your apartments renting at market value ;>)  Good luck with all of this I am going to send you a connection request Edwin

    1Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    3y

    you feel bad that the market is determining rental rates? That’s what pricing is for in a free market economy.

    If you think the market is unfair you can subsidize the rent.

    We have many units we keep under market value. It’s due to good tenants paying on time, keeping the unit clean and keeping maintenance cost low. It’s a business decision based on the high cost of turnover, vacancy, etc…

    Running a good business is moral. Taking care of tenants who take good care of your units is good business for you and for them.

    Make the best business decision.

    Irish Jones Realty4.947 Reviews
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    2Reply
  • Eric Gerakos
    Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes
    3y

    I have a solution to your problem. Instead of being a greedy, heartless landlord and profiting from your investments. Send your rent payments to me! No more guilt! Problem solved!

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    @Daniel D. the last guy raised the rents by selling at the value he did...if he wanted to keep the tenants in the same situation he could have sold it to you at a lower value. He just didn't have the courage to own his actions.

    I wouldn't say the tenants have been taking advantage of the old landlord, and its a dangerous road to think down since it leads to an "us vs. them" mentality. They did everything he asked them to do. It is not their responsibility to assume he didn't know what he was doing.

    They won't be happy with you, and thats understandable. You can show respect to them by doing what you have to do and not apologizing or demeaning them.

    2Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Jonathan R McLaughlin:

    @Daniel D. the last guy raised the rents by selling at the value he did...if he wanted to keep the tenants in the same situation he could have sold it to you at a lower value. He just didn't have the courage to own his actions.

    I wouldn't say the tenants have been taking advantage of the old landlord, and its a dangerous road to think down since it leads to an "us vs. them" mentality. They did everything he asked them to do. It is not their responsibility to assume he didn't know what he was doing.

    They won't be happy with you, and thats understandable. You can show respect to them by doing what you have to do and not apologizing or demeaning them.


    I told them im the property manager and I don't own the building! Doing as I'm told!! I learned that a few properties ago, I'm just a property manager, and it keeps things separated. I tell them if they want to reach the owner, leave a VM at the designated # or send an email. 


    0Reply
  • Jim WellingtonBusiness Member
    Real Estate Agent · Saint Clair Shores, MI · Member since 2022 · 73 posts · 51 votes
    3y

    You have to keep rents either at market or below. If you ever go to sell or refi your rent rates are going to affect your selling price or refi options(particularly with a DSCR loan). As an agent/lender I see subpar rents all the time. It hurts your selling price and your refi options. If you come to me for a dscr loan and yiur rents are subpar I may likely have to reduce your LTV which then inhibits your growth.

    As an investor I just purchased 4 units. Two of the tenants hadn’t had rent increases in 7 years. Guess what?   My offer reflected that and I was able to negotiate a great purchase price because of it. I raised rents 350 per month and one of the tenants wasn’t happy. It makes for a bad situation all around. Your tenants have likely got raises so why shouldn’t you?

    [email protected]586-204-2010
    3Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    @Jim Wellington my favorite thing is when agents talk about "you can definitely raise the rents" and I innocently ask "oh great! why hasn't your client done that?"

    2Reply
  • Matt Bishop
    Rental Property Investor · Dallas, TX · Member since 2020 · 161 posts · 88 votes
    3y

     I would expect my property manager to have already handled it as I expect them to keep rent rates at current market rate. If you had been using a great property manager the last few years, you may very well have thousands of dollars of extra income and not have to be involved with management. Is there a reason why you would want to manage your own property? Is it worth the monetary costs and your valuable time? Have you considered the legal liability you incur by not having professional representation?

    1Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Jonathan R McLaughlin:

    @Jim Wellington my favorite thing is when agents talk about "you can definitely raise the rents" and I innocently ask "oh great! why hasn't your client done that?"


     It is true, they do say that all the time. 

    I know why the previous owner didn't raise the rent. All the tenants are like family, lived there for a long time. The building is in excellent shape, and he never had issues with any of them. They clean the hallways, fix issues that may arise, and do everything else that comes with managing a property. He bought it 30-40 years ago and was still making money with what the rents are now. Even if there was a plumbing problem, they call their own plumber and fix it, the owner did not do a thing.  

    0Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Matt Bishop:

     I would expect my property manager to have already handled it as I expect them to keep rent rates at current market rate. If you had been using a great property manager the last few years, you may very well have thousands of dollars of extra income and not have to be involved with management. Is there a reason why you would want to manage your own property? Is it worth the monetary costs and your valuable time? Have you considered the legal liability you incur by not having professional representation?

     Matt, 
    I just closed on this property a few days ago, there was no property manager. When I purchase a property, I manage the property heavily for the first 3-6 months until i stabilize it and then i hand it over to my property manager, that does all my other rentals. 

    Dan

    0Reply
  • Santiago MarquezPro Member
    Rental Property Investor · Bronx, NY · Member since 2017 · 152 posts · 65 votes
    3y

     Once you've satisfied raising the rents moving fwd checkout leases that will already have the future rental increase mentioned for your agreement. Make a dollar amt or percentage & add into the agreement. This way every tenant knows what to expect. Three or four months before time of next renewal you can send out a pleasant reminder of what you're expecting. 

    1Reply
  • Doug Garrison
    Investor · Greensboro NC · Member since 2015 · 12 posts · 21 votes
    3y

    Dan,

    Thanks for starting this discussion. I'm struggling with the same decision process.

    I'm one of those guys who never raised anyone's rent. I've got tenants who have rented from me for years paying rents from 8 to 10 years ago. Maybe longer. We purchased our properties over the last 30 years and always saw this as retirement savings. We fell in to feeling if the mortgages were being paid off and we had some positive cash flow things were fine. I basically used all the cash flow to pay off the mortgages by the time I reached 65. I retired from my "day job" about a year and a half ago and I'm starting to see the error of my ways. We have plenty to live on from the rentals but there could be quite a bit more. 

    I go from feeling great about what we've built to feeling like a sucker for renting some of the apartments far below market value. This thread has hopefully helped me to try and separate my personal feelings from the business I am in.

    Thanks,

    Doug

    2Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    @Doug Garrison I don't know, sounds like you had a plan and it has worked for you. Real estate should serve your life not the other way around. You can adjust now to what you think is fair and hold on to that feeling. In a business relationship like the tenant-landlord one everyone should feel lucky. Make sure that includes you.

    3Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Doug Garrison:

    Dan,

    Thanks for starting this discussion. I'm struggling with the same decision process.

    I'm one of those guys who never raised anyone's rent. I've got tenants who have rented from me for years paying rents from 8 to 10 years ago. Maybe longer. We purchased our properties over the last 30 years and always saw this as retirement savings. We fell in to feeling if the mortgages were being paid off and we had some positive cash flow things were fine. I basically used all the cash flow to pay off the mortgages by the time I reached 65. I retired from my "day job" about a year and a half ago and I'm starting to see the error of my ways. We have plenty to live on from the rentals but there could be quite a bit more. 

    I go from feeling great about what we've built to feeling like a sucker for renting some of the apartments far below market value. This thread has hopefully helped me to try and separate my personal feelings from the business I am in.

    Thanks,

    Doug


     It's hard to find a middle ground, but there is still time to do the correct thing and raise them little by little. In the end what most people want is what you have now, no day job and living off of your rentals. Congratulations :)

    1Reply
  • Khalid Bryan
    Real Estate Broker · Fort Lauderdale, FL · Member since 2018 · 196 posts · 191 votes
    3y

    hi Dan, I totally understand your concept of not, raising the rent with hopes of retaining the good quality tenets, given the cost of turning a rental around every year by fixing the unit back up, as well as possibly paying a realtor to put another tenant in there. However, regardless, I feel that it is important, if not, crucial to do even the slightest rent increase every year, because we as landlords need to keep up with the local market. The downside to not doing these small increases is that when the market hit an all-time, high or unusual high like it is around now the tenants have a hard time understanding why you’re increasing so much. They don’t understand that the increase is to offset your increased expenses as a landlord. So for example, if you leave your tenant at say $1200 a month for 2 to 3 years and in that time the market has increased to $1600 a month or more not only are you leaving a lot of money on the table but you’re doing them a disservice because when it’s time for them to eventually move, they will have to deal with the shocker seeing what the market really looks like and have a very hard time finding something within their budget. I would agree with your plan to send notices to the tenets and give them the option to either stay at the new rent price in exchange for the upgrades you have planned, which I think is totally fair. Or give them the opportunity to say no that’s too much and try to find somewhere else within their budget, so in that time you can do a full on renovation and bring in new tenants at the top of market value. The only time high as a property manager will not increase the rent is if the property has had a prolonged issue that has not been resolved by the property owner themselves.

    Excuse any typos, I did all this with talk to text .

    1Reply
  • Becca F.
    Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes
    3y
    Quote from @Daniel D.:
    Quote from @Doug Garrison:

    Dan,

    Thanks for starting this discussion. I'm struggling with the same decision process.

    I'm one of those guys who never raised anyone's rent. I've got tenants who have rented from me for years paying rents from 8 to 10 years ago. Maybe longer. We purchased our properties over the last 30 years and always saw this as retirement savings. We fell in to feeling if the mortgages were being paid off and we had some positive cash flow things were fine. I basically used all the cash flow to pay off the mortgages by the time I reached 65. I retired from my "day job" about a year and a half ago and I'm starting to see the error of my ways. We have plenty to live on from the rentals but there could be quite a bit more. 

    I go from feeling great about what we've built to feeling like a sucker for renting some of the apartments far below market value. This thread has hopefully helped me to try and separate my personal feelings from the business I am in.

    Thanks,

    Doug


     It's hard to find a middle ground, but there is still time to do the correct thing and raise them little by little. In the end what most people want is what you have now, no day job and living off of your rentals. Congratulations :)


    1Reply
  • Daniel VineisPro Member
    Real Estate Agent · north jersey · Member since 2018 · 49 posts · 45 votes
    3y

    @Daniel D. This is always hard I have bought probably 50% of my portfolio from tired landlords that haven't raised rents in 8+ years. At the end of the day its a business decision so you have to do it even if you don't feel great about it. The way I always rationalize it in my head is that I offer a product. My product is a completely updated unit thats very well maintained. For me to be able to provide this kinda quality I need it to be at the top of the market for rent. Its like any other store or business in America. Your product wont be for everyone and thats ok. The only other thing you can do is think creatively for them. For one of my units in NC I had to raise the rents over 50% after purchasing it. This was a old man on a ventilator and I felt absolutely terrible about it. So I found a few churches in the area that would give people a months rent to help them get bye. I ended up getting him Somewhere around 4 months of rent from doing this so the increase wasn't as bad. Then I talked to his kids and told them what was going on. He lived there for around 8 more months and then they where able to get him into a home which is really where he needed to be. It didn't completely solve the situation but it gave them a lot more time to find a suitable living arrangement. Another time I had to raise rents close to 50% It was an older couple living in a 2bed 1 bath. I just asked is there anyone that you can ask to move into the extra room that would qualify to live here. There son moved in two months later and they still rent from me. unfortunately most of the time there really is nothing I can do and you just have to have that hard conversation with them. But if I feel I did everything in my power to give them options or help them find a new place then I am fine with any outcome and sleep well at night.

    3Reply
  • Malkia Ra
    Rental Property Investor · Prince George's County, MD · Member since 2022 · 177 posts · 187 votes
    3y

    3 bedrooms and the highest rental is $900 a month?  Sheesh!  

    Your tenants are all well aware they're paying WAY BELOW market rate rent.  If you choose to renovate, do it because it's necessary, not because you want to soften the blow of a rent increase.  Take the emotion out of it and send each tenant a certified letter informing them of the increase.  Landlording is a business; you didn't get into this to be Mother Teresa.

    I understand this may be easier said than done; therefore in your case it's probably in your best interest to hire a property management company if you find yourself unable to separate your personal feelings from the business.

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    3y

    Honestly, this isn't even an increase...it is a complete repositioning of a property from one type of rental to another, and that may be the best way to describe it. 

    1Reply
  • Daniel D.
    OP
    Member since 2019 · 125 posts · 56 votes
    3y
    Quote from @Khalid Bryan:

     hi Dan, I totally understand your concept of not, raising the rent with hopes of retaining the good quality tenets, given the cost of turning a rental around every year by fixing the unit back up, as well as possibly paying a realtor to put another tenant in there. However, regardless, I feel that it is important, if not, crucial to do even the slightest rent increase every year, because we as landlords need to keep up with the local market. The downside to not doing these small increases is that when the market hit an all-time, high or unusual high like it is around now the tenants have a hard time understanding why you’re increasing so much. They don’t understand that the increase is to offset your increased expenses as a landlord. So for example, if you leave your tenant at say $1200 a month for 2 to 3 years and in that time the market has increased to $1600 a month or more not only are you leaving a lot of money on the table but you’re doing them a disservice because when it’s time for them to eventually move, they will have to deal with the shocker seeing what the market really looks like and have a very hard time finding something within their budget. I would agree with your plan to send notices to the tenets and give them the option to either stay at the new rent price in exchange for the upgrades you have planned, which I think is totally fair. Or give them the opportunity to say no that’s too much and try to find somewhere else within their budget, so in that time you can do a full on renovation and bring in new tenants at the top of market value. The only time high as a property manager will not increase the rent is if the property has had a prolonged issue that has not been resolved by the property owner themselves.

    Excuse any typos, I did all this with talk to text .

     I appreciate your response. The previous owner does everyone a disservice by not raising the rents for 20+ years. It will be hard but I have to do it. 

    0Reply
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