Raising rents - looking for your feedback

16 Replies

Dear BP community,

I purchased a fourplex about two months ago.  We replaced the roof and completed all individual tenant repair requests that the previous owner had ignored for over a year.

When I purchased the property, my profit calculations were based on $675/mo rent each.  The issue is that I am currently receiving $625, $635, $650, and $695 (new tenant), averaging around $650/mo each.  

According to the leases, all tenants have not received a rent increase for a couple years and have been on month-to-month for a while.  All tenants pay rent on time and are good overall.  The building is in a desirable area and average rent for 2 bed in the area is $725, but mine may be closer to fair market rent of $700 because we do not offer in unit washer and dryer - we instead have common area with washer and dryer.  

My plan is to increase the $625 and $635 to $660 each and increase the $650 to $675. This would bring the total to nearly my target of $675/mo average.  I was planning on just explaining in my letter that I am increasing rents based on market rent and they are still paying less than fair market rent.

Here is where I am looking for your feedback.  What are your thoughts?  Is this too aggressive?  Not aggressive enough?

Thank you for your insight!

Fair and reasonable IMO.  Many states restrict rent increase and Calif is 10%.

However, new owner and or new tenant is an opportunity to level the playing field.

Your description says you have a nice turnkey rental - - imo, be kind and keep your tenants happy.  Marketing tip:  It's far easier to keep a customer than creating a new one.

I like your overall thinking and approach...an ideal time to increase rents may be when they renew or turn over, but in your analysis you still are just under market, so a raise now may be warranted.... I would incrementally raise rents, but I might let it season a bit, get to know them, and let my early communications be warm and fuzzy, but by spring or with renewals and turnovers incrementally up the rents, provided it does not cause a vacancy, as turnovers will be most of your work and also costly for a four plex owners like us, even more costly than being a few bucks under market. Best of luck

Just be ware that if all of these people are renting an identical unit and now they are all your tenants, they will talk and someone will not be happy about paying more than the others, I would try and bring all the rents to the same price at the same time to be fair. Unless there is absolutely a solid reason why one person's rent is cheaper than the others, and with you being the new owner you have no history to justify this.

Not a Lawyer: but this could lead to someone suing for discrimination.

The rents definitely need to be increased but I'm not sure I would do it in November-December.  Might be hard to fill any vacancies that occur in the winter.  I suggest holding off until spring in case you get some of them leave.

Originally posted by @Kevin Harrison :

Just be ware that if all of these people are renting an identical unit and now they are all your tenants, they will talk and someone will not be happy about paying more than the others, I would try and bring all the rents to the same price at the same time to be fair. Unless there is absolutely a solid reason why one person's rent is cheaper than the others, and with you being the new owner you have no history to justify this.

Not a Lawyer: but this could lead to someone suing for discrimination.

 Kevin,

I am not sure bringing the all the rents to the same is an option because the highest current rent is $695.  I considered bringing the three remaining rents to $670, but that's a big jump for the $625 and $635.  Another option would be to increase each unit rent by $25, which seems to be the 'least discriminatory' option.  Your thoughts?

Originally posted by @Todd Plambeck :

The rents definitely need to be increased but I'm not sure I would do it in November-December.  Might be hard to fill any vacancies that occur in the winter.  I suggest holding off until spring in case you get some of them leave.

 Todd,

The increased rent rate would be in effect January, but your point is valid nonetheless.  That being said, my argument is that people are not willing to move during the winter months, especially here in the midwest.  Also, my current tenants would have difficulty finding a comparable apartment for less than $700 in the same area.

Originally posted by NA Beard:

Fair and reasonable IMO.  Many states restrict rent increase and Calif is 10%.

However, new owner and or new tenant is an opportunity to level the playing field.

Your description says you have a nice turnkey rental - - imo, be kind and keep your tenants happy.  Marketing tip:  It's far easier to keep a customer than creating a new one.

 J Beard,

There is no rent increase restriction in Illinois.  I have been very responsive to all tenant issues since purchasing the property.  I really think they notice a great improvement in service from the previous owner who just did not have his heart in landlording anymore.

Originally posted by @Michael Boyer :

I like your overall thinking and approach...an ideal time to increase rents may be when they renew or turn over, but in your analysis you still are just under market, so a raise now may be warranted.... I would incrementally raise rents, but I might let it season a bit, get to know them, and let my early communications be warm and fuzzy, but by spring or with renewals and turnovers incrementally up the rents, provided it does not cause a vacancy, as turnovers will be most of your work and also costly for a four plex owners like us, even more costly than being a few bucks under market. Best of luck

 Michael,

I was thinking to increase rents effective January and then at the end of spring, renew leases for a year with no additional rent increase.  What is unclear to me is the exact amount I should increase for each unit.  I am currently debating whether it should be $25 increase for each unit (w/exception of the $695) or just increase rent per figures from my original post...

Tenants come and go and when a new one is accepted, you can set the rent as you please.  Because this one is $25 more than the others is no reason to raise all units to this new number.  Rents are set at a point in time and by market values.  When your rents are below market rates, you can easily justify the new value.

Originally posted by @Ernad D. :
Originally posted by @Michael Boyer:

I like your overall thinking and approach...an ideal time to increase rents may be when they renew or turn over, but in your analysis you still are just under market, so a raise now may be warranted.... I would incrementally raise rents, but I might let it season a bit, get to know them, and let my early communications be warm and fuzzy, but by spring or with renewals and turnovers incrementally up the rents, provided it does not cause a vacancy, as turnovers will be most of your work and also costly for a four plex owners like us, even more costly than being a few bucks under market. Best of luck

 Michael,

I was thinking to increase rents effective January and then at the end of spring, renew leases for a year with no additional rent increase.  What is unclear to me is the exact amount I should increase for each unit.  I am currently debating whether it should be $25 increase for each unit (w/exception of the $695) or just increase rent per figures from my original post...

 Well, again, I really like your thoughtful approach to setting rents, a really good sign. My best advice would be to pause on it a bit.. they aren't going anywhere in the next month or two.. "Take your time, think alot" (that is an old Cat Stevens lyric) and go out and study your market super closely, look at the closest comparable units, exactly what they have in terms of amenities, their condition, and look at their price and everything they include. Compare apples to apples closely.. Learn and read about landlording here on BP and elsewhere.This learning and market analysis will make you the expert on market rents and fair rental condition in your immediate area for units like yours. Right now, it sounds like your fourplex is at capacity with good tenants (and sometimes the perfect is the enemy of the good). Don't give them too many reasons to move just yet (unless you think you'd have a rush of tenants for a vacancy)...

I also really like the chiming in above on seasonal aspects and demand. For example, a vacancy in my busy summer months means I will have tons of demand even if someone should not renew. So know your peaks and troughs. Again, having done more turn arounds than I can count, I like to keep a good tenant (good paying and no problems) as long as possible, so for 25 bucks, I maybe would let it ride through the leases (btw, if they are in set fixed term leases, you probably can't up the rent anyway, if I missed that). Also, I have a blog post up on the "Classics of Landlord Lit" and also "Clues to Finding Long Term Tenants".... Because much will depend on the specifics of your market, I can really only stay general but it sounds like you are on the right track in formulating a strategy to get your rents closer to market and retain your tenants and tenant satisfaction (of course, should one leave, I look at the bright side, a chance to improve the unit, get a new long term tenant, and even up the rent when warranted).. Best of luck,,,

Originally posted by @Ernad D. :
Originally posted by @Kevin Harrison:

Just be ware that if all of these people are renting an identical unit and now they are all your tenants, they will talk and someone will not be happy about paying more than the others, I would try and bring all the rents to the same price at the same time to be fair. Unless there is absolutely a solid reason why one person's rent is cheaper than the others, and with you being the new owner you have no history to justify this.

Not a Lawyer: but this could lead to someone suing for discrimination.

 Kevin,

I am not sure bringing the all the rents to the same is an option because the highest current rent is $695.  I considered bringing the three remaining rents to $670, but that's a big jump for the $625 and $635.  Another option would be to increase each unit rent by $25, which seems to be the 'least discriminatory' option.  Your thoughts?

I think if $695 is your highest and closest to current market I would just raise the other 2 whatever amount you feel you could get by with without losing tenants until you have a natural turnover or keep raising them until you are near $695 and then raise them all to around the same amount. I neglected to take into account that with rents around $600 a $50 increase would be a big deal as my rental go for around $1200 and $50 is much less a percentage of the current rent.

@Ernad D.

Recently coming off a pretty high vacancy rate for our area, I would suggest caution. I remember a tip from one of the countless REI books I've read, that goes something like this: Write a letter to each of the tenants (3) that you need to raise the rent on. Make it personal and point out that they are good tenants and that you are a better landlord and are taking good care of the place for them. Let them know that they are paying below market rent, and tell them that an increase is coming. Explain that things are tight for all of us, but let them decide how much on an increase they would be willing to pay to stay in their unit. I've never tried this, but in the example I read about, the landlord was surprised that the tenant came up with a higher number than the landlord was ever thinking about.

Food for thought... chew on that for a little bit.  Best of luck!

I would recommend a lease offered for a year at a very slight increase. Also the option of remaining month to month with a notice that the rent is increasing slightly more at that time, ensuring to mention that with the lease in effect it will shield them from rent increases for the entire year (Leaving a little non said reminder that you can raise month to month rents later in that same year with notice to month to month tenants).  

But when it sold they all started talking about "How long before this guy raises the rents?" so some may be gun shy, I might even offer a year long locked in lease at the current price  for the first year to try and keep everyone calm or even put stager terms in (6 months/1 year/18 months/2 years). Being only two months though my biggest concern would be upsetting the applecart too much and having them all say "I told you, lets go" and you are left trying to rent out all 4 in the winter.

Just remember month to month works both ways

Originally posted by @Kyle N. :

@Ernad D.

Recently coming off a pretty high vacancy rate for our area, I would suggest caution. I remember a tip from one of the countless REI books I've read, that goes something like this: Write a letter to each of the tenants (3) that you need to raise the rent on. Make it personal and point out that they are good tenants and that you are a better landlord and are taking good care of the place for them. Let them know that they are paying below market rent, and tell them that an increase is coming. Explain that things are tight for all of us, but let them decide how much on an increase they would be willing to pay to stay in their unit. I've never tried this, but in the example I read about, the landlord was surprised that the tenant came up with a higher number than the landlord was ever thinking about.

Food for thought... chew on that for a little bit.  Best of luck!

 Kyle,

That is an interesting strategy. Based on my situation, however, I can see it back firing quite easily. The concept seems to be a solid idea when amounts are near market rent and the landlord wants to increase rents to keep up with expenses. That being said, three of my units are well below market rent and if for example the tenants come back and say we can only afford a $10 increase, well then I am not at the rent amount I need to be to hit my ROI projection. I would also bet the tenants would err on the side of telling me an amount that is less than what they can really afford.

Originally posted by @Mike Cumbie :

I would recommend a lease offered for a year at a very slight increase. Also the option of remaining month to month with a notice that the rent is increasing slightly more at that time, ensuring to mention that with the lease in effect it will shield them from rent increases for the entire year (Leaving a little non said reminder that you can raise month to month rents later in that same year with notice to month to month tenants).  

But when it sold they all started talking about "How long before this guy raises the rents?" so some may be gun shy, I might even offer a year long locked in lease at the current price  for the first year to try and keep everyone calm or even put stager terms in (6 months/1 year/18 months/2 years). Being only two months though my biggest concern would be upsetting the applecart too much and having them all say "I told you, lets go" and you are left trying to rent out all 4 in the winter.

Just remember month to month works both ways

 Mike,

I understand your point, however, my three units are 50, 65, and $75 below market rent.  The last unit is at market so I am not going to take any action there.  I will most likely offer a lease for a year in spring of 2016 with no rent increase.  This way, if a tenant does not want to renew and decides to move, I will be in a good position as it is typically much easier to find tenants during the spring/ summer months.  I should have a better understanding on who my tenants are by this time and whether it is worth keeping them for the long haul.  I am not too worried about 'upsetting the apple cart' because these three tenants have been in their units for years now, without receiving any rent increases.  That all being said, I still want to be fair with my increase.