Raising Rent

General Landlording & Rental Properties
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Raising Rent

Sean Connolly
Investor · Boston, MA · Member since 2014 · 82 posts · 24 votes

Hello All,

Just looking for some input. I have recently purchased a single family home and a duplex right next door. I live in the single family now, and kept both tenants in the duplex. They both are very polite, keep to themselves for the most part, and have even helped me with a few things around the property. My dilemma is that one of the tenants rents is grossly under average rent in the area. ( Old owner was his parents ). The longer I am here, the more comfortable I get with the rent as is. Also the more I dread raising the rent. 

Currently, Unit A is rented for $575. Unit B is rented for $750. Both units are 1 bedroom apartments, with walkable attack, basement, private deck, private off street parking and a common yard approximately 1 acre. Both pay own utilities, and have trash pickup provided by me.

Average rent for a 1 bedroom in Westport, MA is $800. 

Just looking for suggestions on whether it is better to keep the rent low, with reliable easy tenants in place, or raise the rent and risk losing those tenants for an unknown future tenants. If so, how would you go about raising it? (They're really nice people!!)

Thanks in advance!

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Curtis BidwellPro Member
Rental Property Investor · Olympia, WA · Member since 2014 · 781 posts · 744 votes
12y

Don't let emotions get in the way of doing proper business.  You are way below market and the tenant knows it.  They will not be offended if you give a 30 Day Notice to increase rent.  I would NOT give 2-3 months notice.  That just gives time to stew over it.  Give the basic required notice and move on.  I would probably do an initial increase of about $40 to unit A.  It may be a stretch, but not near enough to cause him to move.  Perhaps leave unit B until their anniversary date comes up and then do a modest $10-15.  Doing an annual increase cares for your increase in costs and sets a pattern of expectation for the tenant.  

My standard (annual) notice basically says: "due to the increased cost of taxes, insurance and other factors beyond our control, your new rent will be $____, beginning ____.  At this time you may be contacted to do a health/safety inspection.  If you are aware of any issues we need to address please contact us... If you will be relocating in the near future remember that a 30 day notice is required prior to the end of the month..."  

I think the key is to keep it unemotional and professional.  It doesn't really matter if they can "afford an increase", -nobody can.  But they all adjust, just like we do to the new property tax or insurance rates.  

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    12y

    Do you have lease files on both of them and know what income they make to qualify for a higher payment??

    The one at 750 you might not raise as that sounds close to market. The one at 575 is really low so of course the tenant is happy. If you raise close to market they will probably leave as they could find likely a nicer unit at the higher market rates.

    What is the condition of the units especially the low priced one?? If the tenant has lived there forever then it can be really worn down and expensive to rehab and re-tenant.

    If the previous owners didn't keep a detailed file on the tenants now might be the time you go to them for an update of the records. The really low one you might raise it some but not go for SHOCKING the tenant. They will definitely leave then. Usually baby steps is best if you want to keep them.

    No legal advice.    

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  • Mike D.
    Investor · Marion, IA · Member since 2010 · 177 posts · 117 votes
    12y

    I would raise the rent for sure. That's $2500/year that you're missing out on. Maybe give him a 2-3 month notice so he has time to mull it over and possibly stay.

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  • William MurrellPro Member
    Investor · Wilmington, NC · Member since 2013 · 276 posts · 169 votes
    12y

    You should definitely go up on the rent.  It's nice to have a great tenant you get along with, but you're in this to make money first and foremost.  You can either go up all at once and give him a lot of notice, or break it into several smaller raises over time.  I think you should go with the former.

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  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 781 posts · 744 votes
    12y

    Don't let emotions get in the way of doing proper business.  You are way below market and the tenant knows it.  They will not be offended if you give a 30 Day Notice to increase rent.  I would NOT give 2-3 months notice.  That just gives time to stew over it.  Give the basic required notice and move on.  I would probably do an initial increase of about $40 to unit A.  It may be a stretch, but not near enough to cause him to move.  Perhaps leave unit B until their anniversary date comes up and then do a modest $10-15.  Doing an annual increase cares for your increase in costs and sets a pattern of expectation for the tenant.  

    My standard (annual) notice basically says: "due to the increased cost of taxes, insurance and other factors beyond our control, your new rent will be $____, beginning ____.  At this time you may be contacted to do a health/safety inspection.  If you are aware of any issues we need to address please contact us... If you will be relocating in the near future remember that a 30 day notice is required prior to the end of the month..."  

    I think the key is to keep it unemotional and professional.  It doesn't really matter if they can "afford an increase", -nobody can.  But they all adjust, just like we do to the new property tax or insurance rates.  

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  • Account Closed
    Investor · Waynesville, NC · Member since 2014 · 408 posts · 121 votes
    12y

    I know it has been mentioned, but definitely check the lease agreement if there is one. Once the lease runs out, you can give an adequate notice and raise the rents.

    One thing to consider is how long typical vacancies are in your area and how much work the unit will need. If vacancies fill slow and the property needs work, you may want to carefully plan the timing to hit when it is convenient for you and you know you will have the cash on hand to handle it.

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  • Michael Nemeth
    Residential Real Estate Broker · Washington, DC · Member since 2014 · 27 posts · 16 votes
    12y

    @Joel Owens  has some good thoughts and questions that need answering.  The only thing I'd add is timing.  Good thing you are asking now because you may be close to a market deadline.  Increase given today may not be in effect until Aug 1 meaning increase (if 30-day notice is applicable) would be effective Sept 1.

    My guess is that MA Winters start stalling market rentals in Oct which means you may be risking a very long vacancy window if either or both tenants choose to vacate.  That is not a pretty proposition.  

    And there is another variable not touched on: The $500 tenant is the son of the former owner, is that someone you have contact with or a friend?  What outside factors are affected should the increase to market be given?  That unit needs to be brought in line, everyone should be pretty clear on that already so there shouldn't be much debate, but is there any fallout that could affect you personally or the property as an investment?   

    Turnover is always a costly proposition.  Be kind to the tenants but not at expense of the investment and make sure it's at a time that is best for you and the property.  It may be worth raising the $500 immediately and keeping the other set until Spring when rentals pick up again.  What you do NOT want is a fully-vacant duplex all Winter with no renters in sight.

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    Don't be a shock if you raise the rent, and they decide to leave.


    Joe Gore

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  • Curtis BidwellPro Member
    Rental Property Investor · Olympia, WA · Member since 2014 · 781 posts · 744 votes
    12y

    @Michael Nemeth It may seem counterintuitive, but I often schedule my rent increases in the winter months if the family has kids in school (Sec-8 are scheduled for Jan 1, notices go out Nov 1)  While we certainly don't want vacancies, tenants don't want to move during the school year.  Once the new rent is absorbed into their lifestyle they don't think about leaving in the summer because they haven't got a 'reminder that it's time to start looking' via an increase notice.  ...and we don't generally do large enough increases to push them out!

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  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    I'd definitely raise rent on unit A, like someone else said consider about a $50 or so raise. It's enough to make a difference to you, but not enough (most likely) to push the tenant to look for other accommodations. Next year look at another $50 increase if he stays that long.

    That is about an 8% increase per year with rents probably rising 3-4% per year. This will bring you over time back up to closer to market while hopefully avoiding a vacancy. Vacancy isn't always bad, but like Joel mentioned it may not be worth the rehab needed to land a new tenant.

    On your $750, that's right about where I'd want to keep it if market is $800...maybe a little closer to $775 but not too far off. Probably next year look at raising it. Assuming at that time rents were about $825-850 I'd want to shoot for a rent of $790-820. Again just enough below market where you minimize the chance of your tenant vacating but not hurt your income.

    1Reply
  • Jake Jefferies
    Involved In Real Estate · San Francisco, CA · Member since 2014 · 26 posts · 15 votes
    12y

    @Sean Connolly We generally like to keep our rents just under market so tenants still feel like they are getting a good deal and they will realize that if they begin to look elsewhere. We also include a phrase in our rent increase letters that says we know rent increases are never pleasant but if you look elsewhere you will probably find that you are still getting a good deal. This decreases the chances of turnover. A bit off subject but might help to break the increase news.

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  • Shaun Reilly
    Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    I am with the general feel that you should get on the $575 people if the market rent is $800, and not to mess with the $750 too much if you otherwise think they are good residents.

    For the way under unit I'd do something in that $50-75 range at most.  Since they are SO much under market even a bigger hit might not put you in serious danger of having them move if you have a good relationship with them.  I mean on the high end I am saying it is still a good $150 under the market.  Might be able to randomly find a place in that range, but doubtful there is an abundance of places at or below that price point.

    For the $750 guys I would not go up to $800 in one shot, especially if the unit isn't top notch.  Unlike the others there is probably some stock in the $750-775 range and at a minimum they will typically be cleaned and freshened up.  You can probably do something like $25, or less, without driving them out.  If you really like them though I might not worry too much about it since it is a small reward for the risk of them leaving.

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  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
    12y

    You obviously need to make money, but one factor I consider that others have not already mentioned is your time.  I had one very good tenant one time who stayed 12 years.  I never raised her rent that whole time.  That rental was literally no work.  The only things I did was cut up a tree branch that broke, and paint the outside of the house.  She had a special sink faucet installed at her expense when the old one went bad, etc.  When she moved out she even washed the built in drawers.  My time is very valuable.  That tenant allowed me to spend my time making money elsewhere.

    2Reply
  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    12y

    Everyone has their own policy. Personally I keep the rents as close to market as possible with slow increases or in large jumps if they are under market that much. I do so in order to provide my tenants the best product. The cash flow is 1) pays for upgrades/repairs 2) builds my emergency fund 3) makes it worth my time and energy to stay in this business.

    I have seen too many landlords throw in the tower because its not worth it. Come to find out their market values were all undervalue is the chief reason they failed.

    2Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    12y

    Turnover is expensive, and turnover in the winter in the northeast is especially expensive if you have to heat the unit.  No one wants to move over the holidays, and no one wants to move in Jan/Feb if they have any other option.   I think the rental market in Westport is the key factor, however, because the ease of finding something better (and cheaper) will have a big impact on whether they will move.  But $225/mo is significant money for a year, and will pay for a lot of repairs and turnover.

    Personally, I value long term tenants, especially if they pay on time and watch over the property (keeping me informed of things I need to know, etc).  However, you also need to be aware that rental property is valued by the rents, and the lower the rents the lower the value.  

    So I'd leave the 750 unit alone for now, and concentrate on the $575.  I'd jump no more than $50-75 the first time (I'm in agreement with @Shaun Reilly ), and explain to them that the average 1BR is $800.  A walkup attic, private deck and yard is not average, so your unit is perhaps more desireable than most.  If you notice them now,  you can have the new rent by 9/1, and $50 is probably not enough to get them to move.  Or you can wait til after Christmas (or notice them for a rent increase 1/1/15), when they aren't going to want to move in winter.  

    As for how to handle it, if you decide to talk to them, make sure you also provide it in writing.  Make sure there is no lease in place that prevents your raising this rent.  Also, bear in mind, your mortgage is likely  much higher than the mortgage of the parents who sold it to you, and the bank won't care how nice your tenants are if you default.  Good tenants understand rent increases are a fact of life.  The longer you wait the harder it will be.

    2Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    12y

    Always show people respect and never be too greedy.  I try not to raise rents any more that $30 at a time.  I also do not raise rents annually.  I also try to stay a bit under market to make my units affordable for those on fixed incomes.  My units rent up quickly and the good tenants stay.  

    We once raised rent on long time tenant from $600 to $660.  We timed it for just after we did a significant upgrade in her unit.  She squawked a little at the 10% raise, but stayed when she realized the rent was still a good deal for the market we're in.

    In your situation, I would raise the lowest rent unit by $25 now and another $50 in the spring.  Then $50 each year until you are at the same rate as the other unit.   We find it works well to do our rent raises effective May 1.

    Then again, if you are in a good position financially and the property is cash flowing well, there is nothing wrong with keeping the rents under market and rewarding good tenants for their long term business.  Like @Jerry W. points out, your time is valuable too.  Bad tenants and turnovers are costly.

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    12y

    The parents probably sold it to get rid of the kid. You don't even know if he paid any rents to his folks. 

    If the parents want to continue to subsidize him then let them pay you the difference. I would tell that to the kid, you never know maybe they will pay all his rent.

    You are lumping the kid and the one paying market (close) together. Leave the one paying $750 for now and deal wit the kid IMO. It is easier now than later.

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  • Kurt K.
    Investor · in, MI · Member since 2013 · 226 posts · 102 votes
    12y

    Raising the rent is the wise choice, I would personally go to $800 if that is what the going rate is, however, you may choose to go to $750 to match the other unit (if comparable quality). The Tenant may move if they get upset, however, when they go to look for a new place they are likely to only find places for $800, as long as they aren't more modern than yours, there is no reason to leave.

    When I bought my first place, it was a 6-unit multi-family, going rates are about $475 to $500 in my area and an old lady that has been there for 40+ years was paying $305. After buying the place I raised the rent 2 months later from $305 to $485. She said "I understand". No fuss at all. The natural reaction to a rent raise is to be unhappy, however if the tenant knows they've been "getting away with it" for a while, they may not really get upset, even if they show disapproval. 

    You aren't gouging if you bring your rents to market. As above, I didn't take advantage of the older lady and raise her rent to $600, because she is unlikely to move, I simply provided a "fair" price for both parties.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    Raise the rent?  Certainly!  Your tenant knows he has a good deal and will not be surprised that you are raising the rent {he may outwardly act otherwise}.

    We took over a triplex a couple of years ago where the long term tenants in one unit had not see a rise in rent in over eight years.  Their rent was almost $200/mth below market.  We met with them and had the discussion about raising rents - we presented our plan, we would raise there rent by $100/mth over eighteen months ($25 immediately, then an additional $25 every six months).   The Tenants knew their rent was way under market and, until we met with them, were certain they would be moving.  After our meeting, they were relieved and full endorsed our plan.

    We have now embarked on a 2-year plan to renovate their unit (it is in need) ... when we are done, they will be at market rent.

    You can raise rent on a long-term tenant, just do it gently and with respect.

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  • Bruce L.
    Seattle, WA · Member since 2014 · 44 posts · 4 votes
    12y

    I have raised rent for the two properties that I owe the last two years. I was doing some research online, and it is always a good idea to raise rent given that you are not already charging over market price. I always include a nice letter letter explaining why this is necessary, and how this is not as painful for the landlord and the tenants.

    Also, it's always easier to include a tiny bit year after year, instead of a big amount every 5 years or so. Assuming everything has been going well, most people would not move for a small amount difference monthly rent, moving around and looking for housing is just too much hassle, cost and stress =)

    the example letter I use is included below:

    *********************

    Dear Joe,

    The time of the year has come when it is time to renew your lease. I want to continue to have you as residents, and appreciate how friendly and easy you are to work with. Thank you so much for paying your rent on time every month and taking such great care of the property.

    As you can imagine, over the last year our expenses on the property have increased because of taxes, insurance and inflation etc (especially the HOA fee has been increased significantly).

    Anyways, we are swallowing most of the fees since we enjoy having you all as resident and the good news is that your rent is only slightly increasing. We want to make the payments as low as possible and the rent is only increasing$120.00 a month. Your new monthly rent amount will be$1620.00, effective October 1, 2013. If you have any questions about this, please feel free to give me a call. We look forward to having you as resident for a long time.

    Let us know what is a good time to stop by for you guys to sign the new contract (10/1/2013 to 9/20/2014), we can stop by anytime after work tomorrow or thursday. 

    Warmest Regards,

    Bruce

    0Reply
  • Sean Connolly
    OP
    Investor · Boston, MA · Member since 2014 · 82 posts · 24 votes
    12y

    Just to update everyone. I wrote up a lease addendum. Raising rent $75 effective September( Including September rent), and effective February 1st, raising it another $50 to the total of $700. I am happy with the amount of $700 for the time being. However I am starting to think it would be better to raise $50 effective Next month, and then $75 in February. Any input?

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    12y

    Sean,

    I would front load any scheduled increase: $75 first, then $50.

    I would also check your local tenancy laws to see if you can raise rent on a long-term tenant with that short of notice; here we would have to give 90-days notice.

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  • Marrio Barnes
    Real Estate Investor · Milwaukee, WI · Member since 2013 · 37 posts · 54 votes
    12y

    Raise the rent.  But make it easier for the tenant to stay.  I always "give" the tenant a small upgrade to their unit before  I raise the rent. That way they feel like they are getting their money's worth.

    Adding ceiling fans, repainting a room or two, changing the countertops in the kitchen, changing the sink in bathroom will make it harder for them to leave.

    Plus if they do decide to leave, you have already started the process to get the unit ready for the next tenant.  Win-Win.

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