I currently own a fourplex and am living in one of the units. The average market rent for a unit is $600. My units are being rented out for $525, $525, and $510 respectively. The tenants have been residing in the apartment for four years and are excellent tenants. The tenant that pays $510 is an older lady and will complain if rent is increased. She even mentioned to me not to increase the rent when I first purchased the property. They have not had the rent increased in four years. I just purchased the property on 12/12/14 and I am not sure what letter to send to increase the rents or by how much and when. The market rate is only taking into consideration the 2 bedrooms. Each unit has 2 bed rooms, one bath, a washer, dryer, and dishwasher with a detached garage. I need to increase the rents, but do not want to scare the tennants out.
Does anyone have any advice?
Read this recent thread for ideas.
I would address it at lease renewal. Hopefully they don't all renew at the same time or you may have to hold back a bit to make sure that you don't have mass exodus.
I have a friend who has been aggressive with keeping his properties at market, due to their superior quality and high demand area, it has done him well.
We do everything in a controlled fashion, it depends on what else we have going on and how long we would be vacant if they tenant left upon increase.
I don't know where I read it, but we have it in our lease as like a customer loyalty program where if they renew the increase is only $15 of $20 a month for the renewal, depending on the area and size.
This allows people to know up front what the rent situation will be and turns a negative into a perceived positive.
This is what we did when we purchased an 8-plex that was fully occupied and below market rent:
First we introduced ourselves by letter and by making a personal visit to each unit.
Second, we told the tenants we would not be raising the rents at this time - this helped them relax and open up to us.
Third, we changed them over to our rental agreement - we only do month-to-month, which allows us flexibility to change the terms of the agreement (including rent) at the most optimum time.
Fourth, we inspected each unit and while we were there asked the tenants if there was anything that needed repair or if there was anything else they needed - this allowed us to effectively address deferred maintenance and also develop a rapport with the tenants.
Fifth, after three months of adding value to the property they rent and to their rental experience, we raised the rents $30 and again each year until we had them at market rent. That is only an increase of $1 per day. With a tenant that was way under market, we raised rent by $60. One was a senior on fixed income and she did object, but soon came to accept that what we were asking was a fair price, and actually still under market, for the value she was receiving.
@Matt Heath For your situation... I would make $30 step increases to get to $600, tying each step increase to providing something of added value to the tenant. A $30 increase is easy for tenants to wrap their head around as it equates to only $1 per day more. You would be looking at $540 - $570 - $600 as your steps. Bring everyone to $540 as soon as you can. Then next step increase would be to $570 and could be done six months later. Then next year spring bring everyone to $600. You won't be doing the increases during the holidays or in the dead of winter, so you should be good if someone decides to move. Honestly, we have never had a tenant move because of a $30 increase. Many will stay even with a $60 increase. These tenants haven't had their rent increased in four years, so I don't think they will be surprised when you make your move. Remain open and honest with your tenants, treat them with respect, listen to their concerns, respond promptly to maintenance/repair requests and you should be fine. If they move, it will be because they found a better value elsewhere or had to leave for other reasons. Make yours the best value around and they are likely to stay.
1) Review the existing lease agreements to see if they contain any language with regard to rent increases. Some lease agreements are written with increases tied to an index (CPI for example), or tied to the increase in annual taxes or just a set amount or percentage at the end of each expiration/renewal period. If the lease does not contain a provision, then get a new lease drawn up upon the expiration of the existing one with the language.
2) Does the units require any improvements or repairs to bring them up to the standards of your local market competition? If so, then you should complete those updates before addressing a rent increase. If not, then when your tenants are notified of the increase and go looking around, they will find similar units for similar rates and simply won't bother moving out to begin with. Your homework is very important though...if your units are not up to par, the tenants will vacate 8/10 times.
3) Send out your notice to increase rent pursuant to the Lease Agreement which is usually 30-60 days prior to expiration on an Annual Lease.
4) During the same period mentioned above, start advertising your units to build a list of interested individuals. Worst case scenario is you have a waiting list if all your tenants stay on-boarded after the notice of increase.
5) Re-Qualify each tenant to ensure they are able to handle the rent increase. That involves reviewing their income and credit reports. If a tenant is "maxed out" already, then you will have to make a business decision. The last thing you want to do is to increase the rents and then have slow paying or no paying tenants controlling you. Be smart when making a value added decision.
The format of the letter is as simple as this outline:
Introduction of Self as New Owner
- Lay out a plan for the building (improvements, timelines, management, processes/procedures for resolution of issues, etc.)
- Factually describe the current market conditions (how many rentals within an x-mile radius are available, market rents, amenities offered, etc...basically paint a picture of the market.)
- Then close with: leases and past payment history along with the building expenses will be reviewed to determine if adjustments will be forth coming.
Ultimately a value added / stable building is worth more to the community, your neighbors, fellow investors, your lenders and even your tenants though they may not see that initially. When you treat this as a business, and you are fair and balanced in your decisions, then people will respect your decision and you will have a trusted name in the community and in this industry, your name/reputation is extremely valuable. Give your tenants some added value by painting the units, maybe update the kitchens/baths, change out that 4yr old carpet, etc...re-investments into your building is 9/10 win/win scenarios for all.
@Matt Heath I use a very similar process to @Marcia Maynard . The only slight difference for my process is that I tell the tenants during my first introduction that the units are well below market and that we will be addressing that issue. The day you tell them this, they will be on Craigslist and they will know market rents by the end of the day.
I explain to them that we will immediately tackle physical problems with each unit, one unit at a time, but the increases will not be implemented until we complete those repairs/upgrades. If the rents are substantially low, I will tell the tenant that we will not go directly to market prices. Some landlords are concerned that this will scare tenants away. However, I have found that when you buy a building, the tenants are already expecting an increase and after they do their own quick research on market rents they usually quiet down. I also do 1 year leases, so that they know they will be higher then their old rent but under market for the next 12 months. This also gives them some time to adjust their personal finances over a long period of time.
The only word of caution I would have for you, would be to spread the increase from unit to unit over a few different months, not just weeks or days. The reason I do this is so that I have less of a potential for multiple vacant units when lease terms are up.
In this situation I have done both what @Marcia Maynard and @Arlen Chou have done. Meet with the folks. Add value. Make sure their expectations are aware of your conducting a rent assessment. Coming in with rent raises first thing is not advisable, to me. What I always try to when purchasing a property with below market rents is negotiate with the seller to raise rents on their way out. Make them the bad guy!
You stated that comparable rents are $600 without having a Garage. You could mention this when you send out your rent increase letters. After 4 years of no rent increases, one is due even if an older tenant told you not to. You bought the property to make money and increase your net worth. Also, by raising the rents you can tell them that you will do your best to make the place as nice as possible. Are you planning any cosmetic improvements? Any large ticket items like a Roof, Boiler, or AC needing attention? You could always say that you are putting the extra rent in a fund for replacing such and such or painting the place.
I do like the stepping method mentioned above but I would do it annually instead of every 6 months. If they are stable renters that are not demanding much, offer then a 2 year lease with a built in rent increase that is less than what you would have normally done. This gives you the piece of mind of having a unit filled for 24 months and getting an increase at the 12 month mark. This also gives them piece of mind in that they know what the increase will be and can budget for it. Not sure how rare 2 year leases are in your area.
Please keep us updated on what amount you decide to raise the rent and if any of your renters complained.
I am curious to why the previous Owner chose to sell if he/she has had 100% occupancy for 4 years. Is he/she upgrading his portfolio?
Happy Investing and wishing you a good year!
Originally posted by @Steve Vaughan :
What I always try to when purchasing a property with below market rents is negotiate with the seller to raise rents on their way out. Make them the bad guy!
I am curious how this works. How would the seller raise the rents of his/her existing tenants on his way out? I am thinking say for a simple case of a four plex building with four tenants all on leases expiring on different dates, what power does the seller has to increase rents on these tenants before their leases are up?
Unless they are all on month to month, in which case if the seller were to raise rents, and the tenants decide to move out instead, he would be facing $0 rent instead of market rent.
What is your instrument to make the seller raise rent on their way out? Do you put a contingency in your purchase contract for the gross rents to equal or exceed a certain number?
What I have been able to do in the past, is to discuss with the seller that the property is below market rent, let's say 4 units, each below market rent by say $150 to make it easy. I would then calculate for each unit, the total amount under market by multiplying $150 by the number of months till that unit's lease expires. Then a grand total, that would give me a number that I am "losing" by the property being under market till the individual leases run out. I then negotiate with the seller and try to lower the purchase price by that number. In other words, the seller would be paying for the difference. After the leases expire, then it's up to me to bring it up to market.
To get the seller to raise rent as part of the transaction? I don't know if it's practical.
@Sam Leon I was referring to purchasing a multi-family with below market rents and month-to-month agreements, yes. In my area lease renewals aren't that common. After the initial lease, things go automatically to m-m. So I would say, all looks well Mr Seller. According to your rent rolls, units A & B are on a m-m agreement, paying about $75 below market rent per month. We have ourselves a deal after you have given them notice of a $25/mo rent raise, effective in (40-60 days). No inherited tenants have vacated yet because of that. My guess is they may look for a new apt but find they are still getting a good deal staying.
The one thing I would say is, whatever amount you choose to increase the rent by, give the tenants at least 3-4 months notice ahead of time. An increase that they have time to prepare for a few months in the future, will be less likely to scare them off than one you are going to implement immediately.
Also, consider making the increase amount an odd number...increase by $27\month for instance instead of $30. This will make them feel like the increase is tied to actual costs and not just an arbitrary increase if that makes sense.
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