I just bought a duplex in Memphis. 38109 area code. Currently rents for $200 per side. $400/mo total. After all my expenses. I'm left with about $150 a month in profit. The rent is insanely low. Section 8 is paying closer to $600 for a 1 bedroom efficiency in the area. Tenants have been in the units about 3 years. I will eventually raise the rent. I'm looking to raise the rent to about $375 per side. Should I do it all at once or a gradual increase over a year or two. Any thoughts would be appreciated. I should note that cap rate at current rents is 32%.
@Shawn Dandridge best thing you can do is increase your cash flow without incurring any cost. Gradually increase rent on your current tenants rather than kicking them out.
If you doubled the rent you would be looking at a potential increase of $2400. But if it takes a month to find a new tenant and your unit needs even minor repairs, the opportunity cost of getting that higher paying tenant gets squeezed and you open yourself to risk.
Maybe it's worth it in your case but I never give up a paying tenant.
The only time we've tried to increase rent on an inherited tenant, they left pretty quickly. We had the agreement increase every few months until it got closer to market rent.
Is there any deferred maintenance that needs to be done right away regardless of rent? If they leave, will you need to do more to get the unit up to par with the higher rent competition? These are things to consider.
We normally increase rent to market or near market with turnover. We do evaluate all units to determine market rent at least annually. If there was a big difference we would consider splitting the difference, but would need to make sure we use the same logic on all properties, not discriminate. So it is normally easier to do nothing. But rents are finally starting to increase in my area, so I'm sure we'll be analyzing and discussing this more. It's hard to balance rewarding longevity with monetizing the asset with avoiding unneeded turnover costs.
But if you have a tenant stay for many years and never raise rent, you'll get in a situation where it will be more difficult to raise rent due to the precedent you've set, harming returns for yourself and future investors when you are ready to sell.
I agree with @Account Closed
"Gradually increase rent on your current tenants rather than kicking them out."
I would not compare what Section 8 pays to what you can command from cash paying tenants.. Especially in these areas of Memphis ie 38109, 38126, 38106 etc.. Just based off my experience investing, renting, and living in these same areas. You will be fine...
Definitely sounds Insanely low... Around here you can only raise the rent when the lease comes up so I would do it as soon as it comes. If they keep the place nice I would try to approach market rent but not aggressively. If they don't keep the place nice or you see issues with the tenants and the renewals come up at different time I would go straight to market rent and risk the vacancy.
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