Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
I have kept rent very low on one of my units because it needed work. I'm getting work done now and would like to bring it closer to market. I'd love feedback on the following:
Tenant has been great for 15 years. His rent is now $270 below what nearly identical units are paying. In this area, same square footage, amenities, etc. is upward of $1900/month.
Is $270 too big a gap? If so, how much would you raise? Would you increase one increment, or over time?
Investor · McKinney, TX · Member since 2009 · 405 posts · 160 votes
11y
If I wanted to keep the tenant, I'd spread it out over at least 3 years, if I didn't care if they moved or not, 2 years, if I rather they moved anyway - all at once.
Personally, for a long term tenant that has been easy to deal with, and has taken care of the house, I'm OK with rent sliding below market over time.
I have a tenant now that is in her 4th year, and last year was the first time I raised her rent. She keeps the house immaculate and has never been a bother. She's at least $150 under market, maybe $250, but I'm OK with it because she has been such a super tenant. She is set to increase again next year, about 3%, but she'll still be under market.
When she moves I'll bring the place up to market, but until then, I'll enjoy no vacancies, a well kept house and a model tenant. For a tenant of that caliber, being a little under market is fine by me - we both win.
Pittsburgh, PA · Member since 2014 · 79 posts · 70 votes
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I think $270 is too big of gap but I wouldn't try to close it completely. He is getting about a 14% discount right now. I would try to get it to about 7 or 8%.
Off topic: Any chance you have relatives in Pittsburgh, PA?
Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
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I just raised the rent $50 for a tenant that has been there for 2 years. Another tenant has been in a unit for a year, but with the increase in taxes and insurance, we raised the rent $50 as well. Both are about 4% increases.
Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
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Do you want to keep him or are you okay if he leaves? Personally I try REALLY hard to keep the units at market and also in great condition. I know I have made this mistake and it is easy to fall into. To just discount the rent for less "condition". The problem is the condition doesn't get any better but you lose out on rent. So I TRY to just keep the house in good condition and charge top rent.
I you want to keep the tenant I would split the different this year and next year. That way you are back up to market in 2 years but it is more "palatable" to swallow for the tenant.
Investor · McKinney, TX · Member since 2009 · 405 posts · 160 votes
11y
If I wanted to keep the tenant, I'd spread it out over at least 3 years, if I didn't care if they moved or not, 2 years, if I rather they moved anyway - all at once.
Personally, for a long term tenant that has been easy to deal with, and has taken care of the house, I'm OK with rent sliding below market over time.
I have a tenant now that is in her 4th year, and last year was the first time I raised her rent. She keeps the house immaculate and has never been a bother. She's at least $150 under market, maybe $250, but I'm OK with it because she has been such a super tenant. She is set to increase again next year, about 3%, but she'll still be under market.
When she moves I'll bring the place up to market, but until then, I'll enjoy no vacancies, a well kept house and a model tenant. For a tenant of that caliber, being a little under market is fine by me - we both win.
Real Estate Investor · Salem, OR · Member since 2011 · 422 posts · 149 votes
11y
That is a question that I have struggled with myself over the last 3 years. To raise rent or not to raise rent.
Advantages to raising rent: Rent keeps up with inflation, expenses don't out pace CF.
Disadvantages to raising rent: higher turn over, increased turnover costs including remodeling to keep the from looking dated.
So if you took the amount shown above and divided it across 15 years you get a average of 18$ a month. which gives you a increase of 216$ a year. Over the last 15 years you would have realized a extra profit of 25920. Assuming that the tenant was ok with those increases then no problem. You just made a nice chunk of money.
No lets assume that because of your rent increase policies you realize a higher turnover rate. With one month vacancy & "freshening" costs. To keep the math easy, lets say it costs you on average 6k. As long as you expected less than 4 turnovers in 15 years then I would say have at. But if you expected more turnovers than that then I would say not to do it.
I personally have only raised rents upon turnover.
Someone should probably do a study to see which has made the most sense historically.
Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes
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Until just this week, I had not been able to raise rents without the tenants deciding they really should just buy a place, or move to a bigger place if they have to spend more money, or move to a less expensive place altogether. These were tenants who would have been going into their 3rd year, on average.
I was able to raise the rents on all those units by $100 a month, but of course that meant turnover costs for all but one and about a month vacancy each.
This week, I had a tenant going on his 3rd year who agreed to his first increase ($50), and a another starting the 2nd year, also with a $50 increase. Tenants may consider that the devil they know is better than the devil they don't, and moving costs are far more than the annual rent increase. Especially if they moved in just one year ago.
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
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@Account Closed
When we have a situation like that we put together a timeline to get the tenant closer to market rent and then sit down with the tenant to discuss the situation and review the plan.
In your case, I would try to recover $200 - $225 of the deficit, - we would probably lay out a schedule with an immediate $50/mth increase and another $25/quarter over the next 18 to 21 months. We leave the balance ($45 - $70), but be certain to let the tenant know they were getting a discount in exchange for their loyalty ... we've been known to write the lease to explicitly state the full/market price, then show a discount from that price.
Most tenants know when their rent is below market and they are getting a sweet deal. Our experience has been they will normally work with you.
Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
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Usually i'm a fan of leaving it low for long term tenants.
One of the main reasons is you don't have to do a bunch of work on the unit to get it re rented.
Seeing as you have already done the work I'd opt to up the rent a bit. Would'nt be opposed to still giving a discount for a long term tenant but I'd wanna close that gap.
Investor · Baltimore, MD · Member since 2012 · 1k+ posts · 655 votes
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I'd definitely come up with a slow-and-easy plan to get the rents up some. Definitely don't do too much on them cause at the end of the day they've been there for 15 years and that was more than enough time for you to slowly increase their rents.
Investor · Fort Lauderdale, FL · Member since 2012 · 1k+ posts · 465 votes
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I am debating the same on a unit I have that is due for renewal on February 2015.
Current rent for that unit is $1000/month.
Next door identical floor plan not as updated and facing the street traffic just put up a for rent sign asking $1300/month. I don't think anyone would bite at that level, but whatever they are going to rent for, will be an excellent comp for me to use.
One other issue with having the rent depressed for keeping tenants, is that if you ever need to sell the property, say a fourplex where the rent on all four units are depressed, it affects your gross rent and all the numbers your potential buyers will use to derive their prices.
Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
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Thanks everyone for great responses. It’s really helpful to get the perspectives of others. @Account Closed I agree that closing the gap to 7 or 8% makes sense and is along the lines of what I was thinking, so it’s nice to hear that affirmed as in the ballpark of what is reasonable.
Relatives in Pittsburgh? Not that I know of. O’Mahoney is my married name, but it seems like that Irish family tree has some broad reaching branches!
Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
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@Aly W. I definitely am not anxious to turn the unit over. A reliable tenant is such a blessing! I like your all-caps TRY! Trying is the best we can do, right? The unit has been in decent condition, but needs upgrades. I like your idea of spreading the increases out.
Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
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@Rusty Thompson Thanks for working those numbers for me! I hadn’t thought of it from that angle. That's a really valuable perspective. With my current tenant I’m not too concerned about a turnover due to a moderate rent increase, but I want to be fair and offer a benefit by way of lower rent, for being a good tenant.
@Roy N. I like the timeline idea. I was also considering a sit-down with the tenant as you suggest. I was planning to get a new rental/lease agreement signed as we haven’t updated it since move-in. I agree, it's good to be clear about discounts based on a tenant's good history.
Investor · Santa Barbara, CA · Member since 2014 · 96 posts · 23 votes
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@Chris K. Regrettably, increases in recent years there have been fewer and the amounts lower than I'd like. I regret setting this precedent, but because of needed upgrades that we just couldn't afford till now, I couldn't justify larger increases. We just redid the floors and plan some other upgrades, so I feel it’s time to get back on a more typical schedule of increases. Slow-and-easy sounds like a good way to go to make it work for all concerned.
Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes
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I think most of us would say that we will take below market rent to keep a good tenant. How much below rent will vary quite a bit.
For standard tenants (pay on time, moderate ware on house, etc.) - I try and stay between 5 and 10 percent below market. Financially, I probably leave a little on the table, but it's far far less time, and that is what makes it worth it for me as a part-time investor.
The lowest below market that I have ever gone is 20% - but that was a special circumstance and not something I would advocate.
Real Estate Investor · atlanta, GA · Member since 2013 · 456 posts · 237 votes
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I tend to push rate in the beginning but then avoid raises over time provided the tenant is a good one and not a whiner/complainer. What had you doing repairs/upgrades? The trade-off for us is on the resale as every $50 increase a month is really $6,000 in value ($50 x 12 = $600 / .10 = $6k) When was the last increase and how much was it? I'd approach it in terms of tax increases & expenses. It doesn't hurt to have a conversation and see where it lands you. I haven't really faced this with the shared housing model much as our average tenants stays for 18 months. I had one who was with me for 2 years and I raised the rent $100 on 2 different occasions just to get rid of her...she had nowhere to go at the time so she paid the raised rent. She moved out and I rerented in a few days at a better rent and only had to quickly repaint the bedroom & bath. WE get $850 a month for the bedroom in the alpharetta/windward part of north atlanta.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
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For sure and that way you both can budget for future accordingly. In this case, he won't bail at 3% either. His rent will be $2200 in 10 years and still a fair deal = no turnover:) It creeps up slowly but surely. Thanks
Investor · San Francisco, CA · Member since 2014 · 577 posts · 203 votes
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@Account Closed
$100 to $200. I keep my rentals up-to-date and better looking than most other rentals of similar age/quality. I discount the rent and keep them a bit below market to keep renewals high and minimize turnover, which costs avg $1 to 2K. I also do mostly long-term leases of 2 to 3 years.
Investor · San Jose, CA · Member since 2011 · 355 posts · 90 votes
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@Account Closed , if you assume a conservative cap rate of 10%, that $270/mo discount is reducing your property's value by $30,000 (270*12/10%). Even more at a lower cap rate. I think you should raise it to market at your next opportunity. It would be unfortunate if he left, but it's a small price to pay to get your property up to market.
Real Estate Investor · Fort Lauderdale, FL · Member since 2014 · 158 posts · 100 votes
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@Account Closed you've received plenty of good feedback here. I am in favor of improving the unit and raising rents. A very simple approach is to show your tenant the difference in your insurance, property taxes, and other bills compared to the last time you raised rents. It will really bring it home to them that your costs have likely gone way up, while they are still paying the same. If they've been there 15 years they probably like you just as much as you like them, and they will understand your point of view also. Raising rent should be fairly easy. And then do it consistently every year from now on. Good luck!