Haverhill, MA · Member since 2017 · 6 posts · 1 vote
Happy NY!
I recently purchased my second two-family investment property. The top unit is being rented to long time tenants (TAW) for $1250 which is well below market value for the area. I had a conversation with the tenants and they said they would not be able to swing a $200 rental increase and would have to look elsewhere. I agreed to increase their rent in increments of $50/month over 4 months to help them, but they still said they would not be able to stay there paying $1450/month. The previous owner said they are very good tenants. My question is am I getting too greedy or am I making the right decision to maximize my cash flow? Option A would be to find some common ground say $1350/month and lock them into a 1 year lease. Option B I would have to make some repairs to the unit once they moved out i,e rugs, paint, miscellaneous repairs but I am confident I can get $1450-1500 for rent. What would you advise?
Look at it this way....You are risking a good tenant for possibly $100 per month. If they leave you are looking at 1 month vacancy minimum, plus renovation costs. It will take you possibly 2 years or more to break even from that decision, so you have to ask yourself, is it worth the cost? Personally, I would raise the rent $50 per year, with the hopes that they continue to stay long term and their income allows them to afford smaller yearly increases.
I think it is a very good sign that the tenants are fiscally responsible enough to let you know that they cannot afford the $200 extra per month in rent. Add to that they have been living there a while and I think you can make something work with them.
First I would propose a meeting in the middle of $1350 per month and let it play out from there. I bet they jump on it. In the end, if your goal is to hold the property long term I would even keep them at $1250 if they are good paying tenants that take care of their unit. If you are looking to take care of deferred maintenance, get top dollar rents, and sell within the next year then I would let them walk so you can get in there to do the work you mentioned.
Turnovers and vacancies are the cash flow killers for long term small multi family investments from what I have seen. You want to keep good tenants as long as you can. Do the math 45 days of a vacancy PLUS turnover work. It adds up.
It's not like these are the only good tenants that exist. What you charge in rent can also affect the future value of your property. I say you need to charge market rate asap.
Look at it this way....You are risking a good tenant for possibly $100 per month. If they leave you are looking at 1 month vacancy minimum, plus renovation costs. It will take you possibly 2 years or more to break even from that decision, so you have to ask yourself, is it worth the cost? Personally, I would raise the rent $50 per year, with the hopes that they continue to stay long term and their income allows them to afford smaller yearly increases.
$1,450/mo rental rate with 1 month vacancy (for turnover, repairs, etc) = $120 per month (1450/12)
$1,450 - $120 = $1,330.
Therefore, if you can get them up to $1,350, that would be an excellent compromise as it gives you MORE in cash flow than moving them out and having it sit vacant for a month while you turn it over in order to get the $1,450. PLUS you will be rewarding the Tenant's loyalty by giving them a discount on their rent.
When figuring options like yours, you have to balance all of the components. A long term tenant is more valuable than regular turnover, so offering a discount slightly below market isn't a bad thinkg. Also, turnonver will cost you 1 month of rent, so you have to figure that as a monthly figure in order to weigh the option of booting a current tenant.
If you need to make repairs, consider doing them with the current tenant in place. They will appreciate the upgrades, and then you wil be ready for when the unit does turnover.
Thank you for your responses. I am leaning towards keeping them for $1350. Next question is should I put them on a lease or should I keep them as TAW? I feel like I don’t have any security with keeping them TAW but I don’t think they would agree to a lease agreement. Thoughts?
Would it hurt to tell them your willing to offer them $1350 a month, because they have been such great tenants, but only if they are willing to sign a one year lease and seeing how it plays out?
I’m lazy, if I know I’m going to stay somewhere for a year anyway, and this means I don’t have to come up with a new deposit, money to move, and have to take time off, I’m going to sign a lease for the still cheaper then everywhere else apartment as long as you aren’t trying to up it for a ridiculous amount. If you’re raising the rent and going to do some upgrades going to benefit from; so much the better...
The latter. I am in the same situation but have agreed to give them a 5-month lease at only $50/month raise until summer time as I close on the 3rd. Prefer to be looking during summer time vs. now as am already having to try to fill another vacancy that created by me moving out of current unit and into one of the units on the new property after closing, so I need to rent my unit. Winter renting is hard. I am planning on a few upgrades and miscellaneous repairs to the new place which rents were already way below market value but seems the owners left it as such as not much was being done on the property either so I guess they felt it would not warrant rent raises. All that is about to change and in order for me to get a ROI, I need to raise those rents, so for me, I going with option B (final answer). Even without repairs, the place is really below market value. I like to have my units rented, but I also like to positive NOT negative cashflow. Good luck @Niko Crowley
@Eric James, I really like your suggestion to change rents sooner rather than later to reflect market rates. As landlords we get caught up in the fear of raising rents, but hurt ourselves in the process with either very little or no cash flow just to keep a paying tenant. It then makes it impossible to catch up with the market because it is just ridiculous to then later come in and try to up the rents by $150/$250 just to match market. Best to implement indication in lease agreement of a 3% to 6% rent raise with every lease renewal so tenants know to expect and also serves to help you as they may want to renew for longer to lock in that rate You could go lower, maybe just 1 or 2% if they have been nice tenants as a way to reward them. But communicating this annual or per lease renewal rent raise, further helps you be fair to yourself by keeping rents to market value and covering your expenses with some cash flow after. This topic could not have come at a better time as I was just reviewing my own leases as I also work on the ones for the new property that I close on the 3rd. I did realize that I am one of those that is literally $150 to $250 below market value for comparable rental. I have had to look at my expense and my income side by side and I realize that I am offering way more value than I am charging in rents for comparable 2bed/1bath with 1 car garage in Metro Denver, a mistake made as a newbie landlord. I took my current property features and entered them in on about 10 different rental sites just to see what the rents would come back as and I just about fell off my chair! I am definitely, NO DOUBT, raising rents on the new leases and have actually drafted this letter just today and saved to folder to provide to tenants at 45 days prior to their lease end. In the letter I list all the features that we provide and comparable market rents. In the end, if you are offering value, you should be recouping it through appropriate cash flow. Do not make the mistake I made going in low while offering more than market. I am now forced to correct that mistake and it has to be done sooner rather than later. Go in Fair, is what I say and use the market to help you know what to charge. Thanks for this post, very, very useful. Saved to my resource folder.
Happy NY @Niko Crowley! Sounds like you’re in a good situation. What is your CoCR for the potential tenant turnover? Hard to rid quality tenants but I understand the desired increased cash flow, only if the numbers work out.