Rental property with tenants in place - how to go about adjusting the rents?

Question

Hi all! I'm about to close on my first rental property (yay!) - a quadplex in the DFW area with all units rented below the market rent (about 20% below). How would you go about raising the rent - Would you wait for a few months or do it as soon as possible? All tenants are MTM with a good track history. The property should generate about $200/month in cash flow at the current rent. Obviously, it's going to put me in a safer spot if I raise the rent to market value, but this is also my first time dealing with a rental property out of state, so I don't want to come off too hard. There is a property manager in place, and I would like to keep using him.

What do you guys think?

Thanks in advance!!

What do you guys think?

Thanks in advance!!

Michael Smythe · Answer

@Kay Nemen

We’ve found the best way to raise rent is:

• Determine market rent
• Share the proof with the tenant
• Tell the tenant, given your rent is $x and market rent is $y, what do you think if a fair increase?
• Often, they may volunteer a higher amount than you were hoping for.
• Those that respond “$0” or something ridiculous, you can request income documentation from them to justify.
• Don’t be afraid to share with them how much your property taxes & Insurance increased and that YOU cannot afford to absorb them.

ALWAYS get an increase or something of value annually or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

J. Mitchell Bernier · Answer

We have let the property managers handle that for us and just let them know that rent is going up and that they need to sign a new 12-month lease. I wouldn't jump it up 20% immediately, but just bring it up over time personally.

Glen Wiley · Answer

@Madeline Mercer you outlined a nightmare scenario for operating a residential income property. I would not buy an income property in a rent controlled city. Those numbers would leave a landlord bleeding cash under the inflation rates we have seen in recent years.

@Kay Nemen - get comfortable with the idea that rents must increase and must outpace inflation or your returns will eventually degrade to the point where you are loosing money. You may still enjoy gains via appreciation but cash flow is an important part of most investors portfolio. This means that tenants are going to be faced with changes that they are typically not happy with.

Account Closed · Answer

Since there is a property manager in place, I would let them be the bad guy and raise the rents. No need for you to be involved in that at all. No need to wait. Have them notify the tenants as soon as you take over the property. I usually give tenants a 60 day notice when I'm going to raise rents.

And congrats on your first rental property!

Jeremy Brown · Answer

First, definitely consult what the laws are in your area regarding raising rent.  As a rule of thumb, 60 days usually satisfies all time requirements, but some areas have a percentage increase limit or rent control requirements.  Since you are just buying the quadplex, you may not want vacancies right away, so you may want to more gradually bring rents up to market and start with a smaller increase, like 10% if you are 20% under market.  Then hit the remaining amount the following year.  That gives the tenants a better ability to handle the increases and you will be less likely to have empty units, that you will probably need to fix up, costing you more, and have at least a month of vacancy, which cuts into your income.

Madeline Mercer · Answer

I had a similar situation in Irvington Nj, a quadplex as well, with four below market tenants. the city's rent control rules: 472-1 Establishment of rents. (UNLESS OWNER OCCUPIED OR CAPITAL IMPROVEMENTS)

If the land lord supplies heat, rent increase shall not exceed 4%

otherwise don't exceed 3%.

tenants 65 or older 2%

new tenants increase can not exceed 5% over the last tenant's registered rent

you must provide a new tenant the previous rent amount in writing.

you must apply to the city for each increase with 60 days notice, depending on the US department of housing and urban development for a unit of similar size.

fines will be levied on a daily basis if in violation.

What would you do if you found your property is in a rent controlled city?

fortunately or not I lost that deal.

Jake Baker · Answer

@Michael Smythe

Great tip!

Alecia Loveless · Answer

@Kay Nemen I just try to figure out what fair market rent is, write a letter to the tenant, send it certified return receipt and give about 60 days notice.

If there is a lease in place you have to honor that until it ends first.

Rental property with tenants in place - how to go about adjusting the rents?

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