Lease Renewals for Triplex

[Jason Winter]

Hello BP Friends,

I have a 3 unit MF property in Philadelphia with all 3 units rented out. All 3 units are paying well below market. Unit 3 will be leaving in September when their lease ends so we will be able to increase the rent on that one.

Both leases for Units 1 and 2 have expired and are now month-to-month. 

Unit 2 was updated 2 years ago and is paying about $200 lower than median rent for the area.

Unit 1 needs work but is currently paying 44% of median rent for the area. (Can be a pain but never any real issues)

Both tenants in Units 1 and 2 are extremely easy. They both pay on time, every time and haven't had a single issue. 

We have 3 options for both units, and was hoping to get some feedback from this great community.

Option 1: Raise rents reasonably, keep the tenants and slowly increase rents over time.

Option 2: Raise rents a significant amount to bridge the gap between current and market rate. 

Option 3: Inform them, we are not going to renew their lease and pursue STR and MTR, which we already have some experience in.

Ideally our goal for these units is to transition to STR and MTR for all of these units.

Thanks,

Jason W

[Bill B.]

You didn’t say how much rent is. $200 below market on a $600 unit is a big deal. On a $3,000/mo unit it’s ALMOST a non-issue, and you could/would almost certainly lose money if they moved out so you could raise rent $200. 

You want to stay close to market as the “Hate all landlords! They’re evil!” Movement spreads across America. When “landlord friendly” Las Vegas is tying to pass 5% rent caps your rents would be under market for the rest of the property’s life. 

If you like the MTM portion of the current leases just issue an addendum saying the lease to stay the same except starting xx/xx/xxxx (giving more than your city/state’s minimum notice, even tacking on an extra 30 days to be nice.) the rent will be $x,xxx.xx.

If you can raise unit 1 and they stay you’re getting good rent without the thousands spent on upgrades/make ready AND they’re wearing out stuff you plan to replace anyway. If they move out you get your chance to upgrade and reprice. 

Assuming at least 10% of a year’s rent will be lost to soft costs plus any repairs/upgrades for any vacancy, so consider that when doing your math.