I'm a bonehead(?): I agreed to PM suggested large rent increase

Marco G. · 2016-03-04T21:23:49-08:00

I purchased a number of adjoining properties mid last year. This unit came tenant in place on their first year lease. My first lease renewal of 2016 comes up next month and PM suggested a 9+% rent increase. I was very apprehensive about such a large increase and discussed it with them and they didn't think it would be a problem, and if it was, they'd ask for a "counter offer" now that they knew I was willing to be flexible. All of this seemed contrary to how I would do it myself, but the increase would bring it up to par with new leases over the past few months AND I'm really trying hard to not be such a micro-manager. I also expressed my apprehension especially because the property will require a month of vacancy and a few months worth of rent in rehab/updating with what needs to be done. Oh yea, and the leasing fee. Tenant immediately put in their notice to vacate. Tenant always paid on time and never made any frivolous service calls. I let them talk me into it against my gut feeling and feel like an idiot. I'm sure I'm not the first, has anyone had experience salvaging the tenant relationship in this instance? I feel like I can't really go back and say "just kidding, no increase for you"...

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

10y

Disclaimer: I am not an expert in how property management compensation plans work, never having used one and it not being relevant to mortgages except as a single line on Schedule E of tax returns.

Your PM company gets paid more when a new lease is signed, than they do when a great on-time tenant extends their lease for another year for another year of on-time money in your pocket?

Wouldn't that kind of create a perverse incentive to have tenants move out each and every year, so they can get a new leasing fee? Thus, is it the case that your PM company got paid MORE for screwing this up than they would have gotten paid for doing what you wanted?

I'm not rocket scientist, but it may be worth just being completely 100% honest with the tenant one-on-one about how it played out and how it went down. A reasonable person might just understand, and decide that she wants to continue to be your excellent tenant.

Aaaaand then go renegotiate that agreement with the PM company. If you appreciate stability and reliability, the PM company should be paid more when a tenant stays on for another year, and less when a tenant vacates. If that's what you want, anyways.

Again, I'm no rocket scientist, but I kind of think the folks working for me should be paid more for producing the outcomes I want, and less for the outcomes I don't want. My folks get paid more for fast or on time closings (whichever the clients want), and for clean loan approvals (relative to the borrower's situation).

Because that's what I want. You get what you pay for.

6 Reply

Eric G.

Real Estate Broker · Orange, CA · Member since 2015 · 79 posts · 86 votes

10y

Property manager and landlord here. I agree with your gut: if you have a good tenant that pays on time and doesn't abuse service calls, don't rock the boat. I always start my leases at market rent, but if things are going well, I'm happy to renew at the same rate for years to come. They'll end up with under market rent at some point, but I'd rather have continuity than the stress and cost that comes with a turnover. That said, don't be too hard on yourself. It's doubtful your tenant left simply because of the price increase. It costs money to move, not to mention the hassle. If the rate hike was the reason for the move, he would have put in a counter offer. But more than likely there was something you're not privy to. Tenants leave for all types of reasons: job relocation, growing family, etc.

2 Reply

Cody Barrett

Phoenix, AZ · Member since 2015 · 345 posts · 138 votes

10y

Boy this reminds me of my current situation but with no PM involved.. I just closed on a property with a long term tenant who is clean and pays on time with a pretty great tenant file since 2009. The problem is that he is probably 100 bucks below market rent. I don't think finding a new tenant will be difficult but this will be my first time screening tenants and boy will I feel stupid replacing a rock solid tenant with a horrible one just for that extra rent. Tough balance. My gut is saying stability until you get the hang of this management game and responding to maintenance that I've never had to deal with in my life... But another side is saying a little bit of risk might payoff too, he might understand the rent being raised or he might leave.

After reading your post @Marco G.I definitely know how you feel. I think Chris makes a solid suggestion with his post. Lesson gained here maybe.

Thanks for your post Marco!

3 Reply

Andy Beis

Investor · Poplar Bluff, MO · Member since 2014 · 20 posts · 7 votes

10y

Good tenants are always a plus but if your property is priced below the market and nice you should always be able to attract a great renter. I wouldn't worry about it. If some how you have issues renting it back out you could alway reduce the rent to make it more attractive. Aside from any vacancy issue I can't see any negative. Good luck!

1 Reply

Don KonipolBusiness Member

Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes

10y

Depends on the size of your rental portfolio, your desire to maximize profitability vs minimizing hassle, your current finamcial position, etc.

You need to define your goals, what's most important to you, etc. Of course, the quality of the tenant pool for your property will play a major role in any decision.

For a tenant, moving is a hassle, and costs time and money. Often, deciding to move is a knee jerk reaction to receiving notification of a rent increase. I have previously been successful in lessening the "pain" of this increase for the tenants by increasing in stages rather than all at once. Also, i have successfully got tenants to accept hefty rent increases by promising to repaint their unit once they sign the new lease. We paint for a new tenant, why not paint when an existing tenant signs a new lease?

Private Mortgage Financing Partners, LLC

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1 Reply

Gino BarbaroPro Member

Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Marco G.

HI Marco

It is a hit in the short term, but getting rents to market is the goal to increase revenue. Are you sure they were under rented by 9%. The only way to find out is if you can rent it at the new proposed rate.

If your intentions are to rehab the unit, it needs to get done sooner or later. Once rehabbed, you will find another tenant.

Good Luck

Gino

Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly

1 Reply

Wesley W.

Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes

10y

@Brie Schmidt has structured what I think is a brilliant agreement for her PMs that incentivizes them for keeping good tenants, instead of the "churning" we are seeing.

When my portfolio gets too big to self-manage, I am definitely using her idea! She articulated it as a guest on the BP podcast some months ago.

0 Reply

Marco G.

OP

Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes

10y

Thanks Wesley Williams I will check out the podcast. If I could have the tenants average 2.5yr stays it makes the difference between a loss and a gain.

0 Reply

Leland Barrow

Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes

10y

I think it is all about the approach. Tenants just like employees use equity theory. Getting what you want and not over balancing the tenants idea of equity is tough. My suggestion would be to raise rents gradually and offset them by giving the tenant a nice card with a gift card for Starbucks or similar. If you raise their rent $75 dollars a month but send them a Starbucks gift card for $100. It is an easier pill to swallow. What does it cost you to place a tenant? If it costs a $1,000 to place a tenant then raising the rent and giving the tenant $500 in gift cards for a signed lease is a win win situation. Add in nice card that thanks them for being great tenants and explains the rental increase is a nice touch. I would only do that for a really good tenant. It shows that you care and they can justify paying the extra rent to a landlord that cares. Do you give gift cards every-time a good tenant resigns a lease? Here is a trick let a good tenant go month to month until December. In December offer to give them a $150 gift card if they sign another one year lease. December is a great month to keep a tenant resigning a lease in exchange for a gift card. Things get tight in December for many families. A $150 can make a big difference for them while saving you the vacancy expense. All you are really doing is buying more money. Make sure you word things appropriately and legally.

1 Reply

Elizabeth Colegrove

Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes

10y

Everyone is different but honestly I have 8 houses and how your property management acted is how I would. Below market rents, means loss of revenue and this is a business too me. While great tenants are amazing, them paying on time and behaving is their JOB as a tenant. I do work with higher clientele, but I have been always able to replace them quickly with no vacancy. Therefore I do increase rents, I have a 38 page lease where I require my tenants to behave and I hold their feet to the fire. This has allowed me to be very successful and have a great business after only 4.5 years of empire building at the age of 28.

Good luck

1 Reply

Leland Barrow

Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes

10y

@Elizabeth Colegrove I am not sure what behave means. From my perspective it is just a business exchange of goods/services for money. If behave means that the tenant pays the agreed upon amount of rent on time, takes care of the property, and that they are respectful of my time then I fully agree, they should behave. If behave means something else then I wouldn't know. As for being a tenant being a job, I wouldn't know about that either. I don't do section 8, that is the only tenants that their job might being a tenant, so I usually choose tenants that already have a job and need a place live. I think customer service and understanding selling a product is important in any business. The OP's comment was that he preferred to have kept that tenant and instead was misguided by his PM. I would take a lifelong tenant that never calls me, takes care of the property, and accepts small increases in rent all of the time. In fact that is my ideal tenant! How many times are you going to find an ideal tenant? Every-time that you place a tenant you are taking a chance, gambling that they are level headed people. If you get an ideal tenant you may have to apply a bit of customer service, sales ability, and a bit of appreciation from time to time to keep those tenants. I would spend $1 all day long to get $2 in return. Most landlords fail because they do not run rentals like a business. They have to use a PM because they cant understand how to make a series of transactions on a personal level that benefit both parties. Then the PMs that they choose just suck at running rentals as a business also, so they are stuck in a cycle of neurotic business practices.

0 Reply

Elizabeth Colegrove

Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes

10y

Originally posted by @Leland Barrow:

@Elizabeth Colegrove I am not sure what behave means. From my perspective it is just a business exchange of goods/services for money. If behave means that the tenant pays the agreed upon amount of rent on time, takes care of the property, and that they are respectful of my time then I fully agree, they should behave. If behave means something else then I wouldn't know.

Yup that is what I meant. I guess I fell like when people have tenants that do this they think this is extraordinary when I feel like it is a normal expectation.

As for being a tenant being a job, I wouldn't know about that either. I don't do section 8, that is the only tenants that their job might being a tenant, so I usually choose tenants that already have a job and need a place live. I think customer service and understanding selling a product is important in any business.

Being a landlord is a job to me. I am running a business and I wish to make money and have a business that grow. I run this as a business with a goal of making money and keeping my house in great shape.

The OP's comment was that he preferred to have kept that tenant and instead was misguided by his PM. I would take a lifelong tenant that never calls me, takes care of the property, and accepts small increases in rent all of the time. In fact that is my ideal tenant! How many times are you going to find an ideal tenant?

I find them all the time because those are my expectations and I allow nothing less. My lease goes along way into creating that type of tenant. I have a break lease fee, a repairs deductible (prevent the time wasters)

Every-time that you place a tenant you are taking a chance, gambling that they are level headed people. If you get an ideal tenant you may have to apply a bit of customer service, sales ability, and a bit of appreciation from time to time to keep those tenants. I would spend $1 all day long to get $2 in return.

I have just learned how to spend .25 or less to get the $2. I have learned that with great lease practices and management. I can have high expectation have tenants who meet them, without spending tons.

Most landlords fail because they do not run rentals like a business. They have to use a PM because they cant understand how to make a series of transactions on a personal level that benefit both parties. Then the PMs that they choose just suck at running rentals as a business also, so they are stuck in a cycle of neurotic business practices.

I love this forum because everyone can have different takes and experience and all share them together.

1 Reply

Doug H.

Rental Property Investor · San Diego, CA · Member since 2015 · 96 posts · 59 votes

10y

20 yr property manager and landlord..... One of my single best pieces of advice: Don't be afraid of residents leaving. Period. Ever. That fear will both A) put you in a bad negotiating/management position and B) lead to bad management decisions. If you stay in the game, you will have to learn competent leasing skills. When you have faith in those skills, you won't be afraid to lose residents. Also, property management terms are always negotiable. Offer them a slightly higher percentage with no lease-up fee.

3 Reply

Lesley Resnick

Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

10y

Passive income is the goal. I do not want to spend my time fixing and filling units, due to a rent increase. It is a poor use of my time and rarely is it profitable. If a unit sits empty for a moth, it costs you 8.3% of the years gross plus any other money to prepare the unit. Additionally, it has an impact on cash flow, since you still have the same expenses. My approach is no increase if you pay on time and don't trash the place. If the tenant eventually gets a below market rental, good for them. I never want to chase the last dollar, it is the most expensive.

2 Reply

Doug H.

Rental Property Investor · San Diego, CA · Member since 2015 · 96 posts · 59 votes

10y

Lesley Resnick Well.... That can depend on whether or not you are 5+ units. A 5+ unit multifamily is valued on a gross rent multiplayer, so if the rent raise is enough, it can increase the value of the building far beyond any loss to vacancy. For example, in San Diego, a $500/mo rent increase will increase the value of a 5+ building by over 100k. If your business model involves periodically pulling equity out of your portfolio to purchase new properties, that value increase far overshadows the vacancy loss.

0 Reply

Tim G.

Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes

10y

if you are within 10% and you know the unit will need updating.. it seems silly to go for a big increase.

Hit it for a tiny increase they won't feel and move on.

The leasing manager likely gets a bonus too on the new tenant, they just made work for themselves at your expense.

0 Reply

Justin R.

Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes

10y

@Marco G. and @Lesley Resnick FWIW, I've had really good success by doing the following:

1. In every lease, specify that there will be an annual rental increase every year, but that it'll be capped at 3%. Outcome: Tenant appreciates I won't hit them with a huge increase.

2. Increase the rent every year by *some* amount below 3%. I've increased by as little as $5. Outcome: Consistently rising income from my properties ... and tenant feels like it was better than it could have been for them.

3. Throughout the year, and at each rental increase, explain ways that a larger increase was avoided. For example: "Thank you for allowing the appraiser to walk through the property last October - I was able to get better terms from the bank, which helped limit the rental increase." Or, "Thank you for reporting the leaking toilet - with your help, water costs have remained under control." Or, "Thank you for cleaning the gutters - with your help, repair costs have remained under control."

I've seen some interesting behavior. For example, one tenant offered to add the cost of a gardener to their monthly payment so they could avoid an increase in rent. Go figure. Another tenant paid someone to replace their screendoor so they could avoid a rent increase the next year.

Not a huge sample size, but making these folks part of the solution in this way has been working for me.

4 Reply

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

I typically wait for natural attrition before making adjustments on FMR

1 Reply

Lesley Resnick

Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes

10y

Originally posted by @Doug H.:

Lesley Resnick Well.... That can depend on whether or not you are 5+ units. A 5+ unit multifamily is valued on a gross rent multiplayer, so if the rent raise is enough, it can increase the value of the building far beyond any loss to vacancy.

For example, in San Diego, a $500/mo rent increase will increase the value of a 5+ building by over 100k.

If your business model involves periodically pulling equity out of your portfolio to purchase new properties, that value increase far overshadows the vacancy loss.

I am not following your numbers.

500 a month is $6k a year. How does that get you 100k in increased value?

0 Reply

Marco G.

OP

Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes

10y

Lesley Resnick GRM is about 16 in so cal.

0 Reply

Marco G.

OP

Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes

10y

Justin R. That is a very novel approach with some interesting results!!

1 Reply

Casey Murray

Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes

10y

Responding because I'd like to see upcoming comments. The feedback on this topic are insightful. Great tips @Justin R.

0 Reply

Scott Weaner

Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes

10y

My feeling is that small increases will not prompt a tenant from leaving, and will over the years increase cash-flow. I am talking $10-20/month. $100/month will surely make many move.

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

10y

As a business I insure my rents are raised every year without exception. As with any business you do what is necessary to be competitive but in this business there is always a customer waiting in line if you are at market rent. My rental rates have no bearing on whether I like my tenant or not. Not sure how businesses can operate under that premise and make maximum return. I guess some investors prefer to supplement their tenants rent rather than have to work to earn maximum return.

I wake up every morning with the goal of making more money every day as opposed to being satisfied with diminished income due to erosion through the increased cost of living. I always thought that was everyone's goal.

Marco in my opinion you made the correct business decision and as with Doug H. I accept tenants come and go but that does not drive my business decssions.

0 Reply

Doug H.

Rental Property Investor · San Diego, CA · Member since 2015 · 96 posts · 59 votes

10y

Lesley Resnick There are a number of articles on bigger pockets that do an infinitely better job of explaining GRM than I will, like: https://www.biggerpockets.com/renewsblog/2011/11/09/gross-rent-multiplier-–-techniques-to-speed-up-your-decision-making-part-ii/ It's the primary way banks will value your commercial multifamily buildings to determine the loan amount you can take out. So, 6k per year rent roll increase can have a massive amount of building value increase. It's part of the magic of owning larger buildings. Find one being poorly run, buy it, reform the rent roll instantly increasing building value drastically, and take out all the cash you put in to acquire the building. Suddenly, you have a cash flowing building with no money invested. ...on to the next.

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I'm a bonehead(?): I agreed to PM suggested large rent increase

I'm a bonehead(?): I agreed to PM suggested large rent increase

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