I have a rental in California that is $1200 below market (no rent control). Initially rented below market by $300. When I look at current market, I realize I could be getting a lot more. I have a tenant I would like to keep however I'm not sure how to do this. Tenant has been renting for 5 years with increase of $60 in year 2 and $60 in year 4, and I would like to increase $100 this May and another $100 in 6 months. Does this seem reasonable?

Thanks.

If they are good tenants.  Then maintain your normal rental increase.  If you get to aggressive they may move. 

I often accompany a rent increase with installing something that the tenant will appreciate and that will also increase my property value- a ceiling fan, a garbage disposal, new screen door, etc. It can help keep their attitude good.

Na M.  $1,200 below market is a significant business decision.  It is hard to be sensitive to tenants when you are financially miss managing.  Raise the rent to $200 below market.  60-90 day notice.

Frank 

Originally posted by @Frank R.:

@K M.  $1,200 below market is a significant business decision.  It is hard to be sensitive to tenants when you are financially miss managing.  Raise the rent to $200 below market.  60-90 day notice.

Frank 

Thanks. I realize with the significant increase,  that I may end up losing my tenant.

You are losing $14,000 annually if your assessment is correct. At that rate your tenant may stay forever. Can you afford that? Why would you want to?

I agree with @Chris Volkers  that improvements ease the pain of the rent increase.  I'm just working out a fairly hefty increase with a good tenant by putting in new windows and other significant improvements.  We had a good discussion and told him I don't want to lose a good tenant, but his rent was below market.  He knew it was the case as the other side of the duplex was just upgraded and rented $200 over his rent.  Shoot for a win/win.

$1200 a month below or a year?

Honestly if it is a month, to "me" that is a HUGE loss at $14,600 a year. While I understand we have a heart, I couldn't take that kind of loss. I would raise it to market and worst case find new tenants. 

Originally posted by Na M.:

I have a rental in California that is $1200 below market (no rent control). Initially rented below market by $300. When I look at current market, I realize I could be getting a lot more. I have a tenant I would like to keep however I'm not sure how to do this. Tenant has been renting for 5 years with increase of $60 in year 2 and $60 in year 4, and I would like to increase $100 this May and another $100 in 6 months. Does this seem reasonable?

Thanks.

 Can you clarify your question?  You are not saying you are $1200 per month below market, are you?  Because if you are, then you need to not tinker with $100 increase at a time but basically give termination notice and then re-list at market rents.  It's unlikely that your current tenants will be able to stay, but they have the option to do so (at the higher rent).  You are just losing way too much money - out of curiosity, if you are $1200 below market, what is the actual market rent?

If you are a small amount below market, then may a stepwise increase would be justified.  In MY book, if they are good long term tenants, staying a bit blow market (NOT $1200 though!) is fine too.

Note: I am not local. I didn’t realize how the rents soared in the last 5 years. The only comp is listing for $3900 which may be high. Zillow reports $3200/mo. Currently collecting $1950.

Thanks for the feedback.

Originally posted by @Kally M. :

Note: I am not local. I didn’t realize how the rents soared in the last 5 years. The only comp is listing for $3900 which may be high. Zillow reports $3200/mo. Currently collecting $1950.

Thanks for the feedback.

 OK, thanks for the clarification.  Zillow is not too reliable, so you will want to use a few additional tools to check rental comps in the area (CL, rentometer.com, a local RE agent) to make sure what the true market numbers are.  That said, if the place is in good shape (i.e. you won;t have to remodel in a major way before re-renting), then I would still proceed as I suggested above.  Terminate the current ;lease whenever possible, touch up the place, and re-rent at market value.  I'm usually all for hanging on to good longterm tenants, but if the difference is THAT large, I think you have to take drastic action.

Don't feel that this is the only tenant you will ever be able to get.  Give them notice of the rent increasing to market rates in 90 days (or whatever you lease stipulates) so they can decide if they want to stay or move.  If they say they want to move you should have plenty of time to market it and possibly even have it rented before the current tenant leaves.

Verify your rent first so you are on target for the new rate.

I use Rentometer.com and feel that it is reasonably accurate.

I pulled a couple of my places up on zillow just for the heck of it.  The rent estimate was 20% ($300) over actual market rent.  Careful you don't try to rent for $3900 and sit vacant!

@Steve Vaughan   Just curious but what does rentometer.com show for rents on your properties?  I am curious if they are more accurate.

Thanks for asking @Bob E.  .  Never used rentometer before. They came back at what I was expecting as market rent.  Zillow said $1695, rentometer $1395.  The $300 (20%) overage by zillow is what I was citing!

@Steve Vaughan   thanks for validating.  I have always had a little more trust in rentometer numbers then Zillow so I am glad they are in line in your market too.

 OK, thanks for the clarification.  Zillow is not too reliable, so you will want to use a few additional tools to check rental comps in the area (CL, rentometer.com, a local RE agent) to make sure what the true market numbers are.  That said, if the place is in good shape (i.e. you won;t have to remodel in a major way before re-renting), then I would still proceed as I suggested above.  Terminate the current ;lease whenever possible, touch up the place, and re-rent at market value.  I'm usually all for hanging on to good longterm tenants, but if the difference is THAT large, I think you have to take drastic action.

Thanks! It appears that Zillow was little more inflated than rentometer. Although the difference is still great ($900), at least I know what to aim for now.

Thanks  everyone.

You should be able to factor in if it's a SFH ot TH or Apartment and also baths and also SQFT. The wild estimate variations is due to that.

Originally posted by @Elizabeth Colegrove:

$1200 a month below or a year?

Honestly if it is a month, to "me" that is a HUGE loss at $14,600 a year. While I understand we have a heart, I couldn't take that kind of loss. I would raise it to market and worst case find new tenants. 

 Agreed. It's one thing to be generous, it's another to be throwing money away.

Originally posted by @Kally M. :

 OK, thanks for the clarification.  Zillow is not too reliable, so you will want to use a few additional tools to check rental comps in the area (CL, rentometer.com, a local RE agent) to make sure what the true market numbers are.  That said, if the place is in good shape (i.e. you won;t have to remodel in a major way before re-renting), then I would still proceed as I suggested above.  Terminate the current ;lease whenever possible, touch up the place, and re-rent at market value.  I'm usually all for hanging on to good longterm tenants, but if the difference is THAT large, I think you have to take drastic action.

Thanks! It appears that Zillow was little more inflated than rentometer. Although the difference is still great ($900), at least I know what to aim for now.

Thanks  everyone.

 Before your action (whether you decide a little or a lot), how about checking the rents with rental agents and/or Craigslist?  They can be more reliable at times.

I'm facing a similar situation, in the Bay Area.  I've raised rents annually 4% on average, but that hasn't kept pace with the market in this part of the country. My initial tenant stayed for 18 years, and when he did move his roommate stayed.  So no turnover in 20 years. My current tenant is great and I'm loathe to do a big increase.  Trying to bite the bullet...

Just found this info online....yes rents are high, but many people CAN afford it.  So that makes me feel a bit better :-)

https://sf.curbed.com/2017/11/13/16640936/san-francisco-rent-burden-2017

Don't feel bad upping the rent.  If it is just slightly below market rent (for the "loyalty" factor), then your Tenant most likely already knows that he is getting a smoking deal.  If not, he will go out looking for a place to move to and discover that he already has a good deal.  Either way, you'll get your rent increase.

I have only ever had 1 Tenant question me, and request a lower rental rate.  She brought me a listing for a property in the neighborhood that was $200 less per month.  It was a total dump.  I called her bluff and told her no hard feelings, but if she wanted the discount, she could move to the cheaper property.  Of course, she didn't.  She renewed.

Just wondering @Kally M. You said you aren’t local. Then do you use a PM? They should definitely be talking to you about market rents and if they aren’t then it is time to go looking for a new company.