I just bought a 4 plex that is old but in pretty good condition for a C+ neighborhood. I know that the rents are lower than what I could probably get, but I have decent tenants in place since before I purchased the property. The first issue is that even though all 4 units are very comparable, they are not renting for equal amounts. I am receiving $450 for 2 units, $410 and $400 for the other 2 units. 2 leases are expiring in April 1=$450 per month and has already expressed no desire to leave, 1=$400 per month with an unknown intent. I have one tenant on a month to month agreement for $410 per month and has expressed concern of new ownership and that she is comfortable with where she is (she has lived here for 12 years). I have assured her that everything will remain the same for now, and she will be given 30 days notice for any changes. The final tenant is renting for $450 and his mother pays his rent every month and he seems like a loser, but other than smoking in the unit, he seems to be an okay tenant.
I obviously am not going to do anything until the spring so that I don't lose any tenants at a time that is very difficult to get new tenants. I would like some advice to how and raise rents on the current tenants with somewhat of a low likelihood of losing them. For this property, I would be happy with rents close to $500 per month. Please help! This is my first rental and could use some expert advice. It is also my first bigger pockets post. Thanks!
I’m interested to get some advice myself. I’m in the same boat. My inherited tenants are paying $150-200 less than the going rate. I know they will not like the lease renewal coming up.
What are market rents? Start by looking at comps to see what is reasonable for the area. If you truly are below market than more than likely the tenants already know that or they'll find out when they look. Moving will be expensive and if they won't find anything cheaper, they'll stay.
We provide also provide 3 choices at renewals - for example - if you renew for 1 year it's a $25 increase, 6 month is $40 and month to month is say $65.
Most tenants won't leave for $25. If you want more, you might put comps in your letter.
I have inherited many low paying tenants...But I may not be the best guy to give you the "business" answer.
Do to my personal beliefs and morals, I do not raise rent on quality tenants even if they are below market. Looking at numbers objectively like investors do, means a percentage. That "percentage" to someone else may be food on the table, especially when talking about tenants on in your mentioned socioeconomic class at 400 dollar doors.
If you do raise rents, just do it slow and use communication with your residents. Even better, buy the property where it works NOW.
With that being said, I evict bad tenants. When the tenants leave I rehab the unit to obtain the highest market rents.
Best of luck.
@ryan c. $200 is a bigger jump. How much will you have to spend to get that increase? I always look in terms of the return. Lets say you have to spend $5000 to get a $150, that's a 36% return and I'd go for it. Offer them the unit at the increased rent and if they stay, you win really big. If they leave you still get a great return.
Just have to figure out the true cost to turn the unit and how much you can increase.
Good luck to you as well!
Early in my investing I remember a friend bought a property and he told the tenants he was going to raise the rents. They said "Yes we know that would happen as we have been paying way below market for a long time"
Two points to remember, if you raise the rent to market rent, any property they look at will also be at market. Next, no one wants the hassle of moving, especially if it only gets them what they have now.
That said one of the largest expenses for a landlord is turnover cost. It is worth keeping the rent at a moderate level to keep tenants longer.
One strategy is raise the rent but give some kind of benefit for renewing the lease.
I haven't been immediately raising rents on my inherited tenants. I usually go in and renovate empty units and then offer renovated units to existing tenants at higher rates. That gets some of them. I give 3 months notice and then add pet rent for all unauthorized pets that gets more of them. Usually you'll lose some tenants to attrition to in the first year too. If I had someone in there for 12 years, I'd want to keep her. Talk to her about money, is she on a fixed income? For the kid whos Mom pays, I'd go ahead and raise the rent on him when his lease is up.
Inherited Tenants: I have inherited tenants several times with low rents. I let them know up front that will be going up on rents, but give them a 6 month notice. I raise the rents usually $30 on the first raise. I remind them 30 days before also. I continue to raise every 6 months until it gets to market.
Usually the properties are in rough shape, so as I go up on rent they are seeing improvements on their units. If a unit goes vacant, I do the full rehab and lease it out at market.
I am a firm believer in making sure that a property cash flows.
Thank you everybody for the great advice. My property cash flows well with rents where they are currently at. I think that a slow methodical approach to minimize turnover would be the best route for the situation. I don't want to lose good tenants if it can be avoided.
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There a lot of people who advocate just raise the rent. Of course everyone wants to make more on their properties. However, I believe there is more to the analysis.
There are 3 key questions to address.
1. What is the market rent?
2. What will it cost you to find another tenant at market? At market rent, tenant alternatives are available and the possibility of finding something else that is below market and them moving out..
3. Could you get more than you are getting and them not leave?
Issues to consider:
1. How long will the property be vacant? i.e if you raise the rent by 50 on a 450 apartment. It will take you 9 months to break even.
2. How much will it cost to turn the unit? Deferred cosmetic mainence will need to be addressed, floors, walls, kitchen, etc. With this expense, you could be getting into the one year break even.
3. Do you have the time and energy to deal with change in tenants? There is no way to know if they will be good tenants until it is to late.
@Justin R. I have to agree with Justin...I have a place that's legit cash-flowing in a generally appreciating area. Rents are about 75 under value. Tenants are great, responsible people. When they leave it will cost me: lost rent, general cleaning, repairs and replacement of wear items. That's probably $1500-2000. If they don't leave I defer that expense to some future time.
Of course on a long-enough timeline jacking the rent up high and getting higher-paying tenants is the better option. You can chart the ROI out and see when the break-even point occurs.
For me, I think the return is better to go 20/year (vs 75 at once) and have low-maintenance tenants I don't have to worry about.
When I take over a property with under market rents I clean house. By raising rent to market I immediately force appreciation on my property. If tenants choose to leave, which is not that often, I replace them with better quality tenants since higher rents will attract higher quality tenants.
My business policy is to not devalue my investments by supplementing tenants rent through charging under market. I also do not worry about vacancies since vacancies are built into my expenses and I have honed the tenant search to the point where I can usually replace tenants with little to no down time.
Give 3 months notice to your tenants that rents will be going to $500, based on their leases ending, and you will have 3 months to find replacements for those tenants that may choose to leave.
Keep all tenants on M2M for full control of your investment. Term leases only benefit tenants.
Thomas S. can you explain why a month to month lease is better than a one year lease? It seems like for planned turnovers, one year leases would minimize vacancy and not leave you with a vacancy in sub zero temperatures. Is it easier to get rid of bad tenants that way?
As others have already said, the key is to do a thorough rent survey so you know what your tenants' alternatives are. Yes, when you increase their rents they will look elsewhere. But if they look and see that nothing cheaper exists, they likely will not want the hassle of moving. I increase my rents upon every lease renewal and rarely have people move because of the rent increase. If you manage the property well and are responsive to maintenance requests, your tenants will understand that they are getting something for their money.
Also, remember that one of the beauties of this business is you get to pick your customers. You want tenants who play the game the way you want it played. If a tenant doesn't want to pay the rent you want to charge, then they aren't the tenant for you. Let them leave. This is your opportunity to get a better tenant in there (I'm thinking specifically about the one you called a loser...let him go if he wants to). This is a long term game and sometimes you have to suffer a little right now for huge improvements down the road.
Add up how much money you will be gifting those tenants by charging under market rents if they stay for 10 years, which they will because moving will cost them more money. Tenants who are paying under market rent hardly ever leave, but that's not necessarily a good thing.
I agree with @Lawrence Allmond about reinvesting back into the units. When you raise rents to market many tenants will produce a list of repairs that they had been sitting on before because they didn't want to risk having their rent raised. I'm always ready for that and I make all of the repairs with a smile. I often times end up doing almost an entire rent turn (new carpet, flooring paint, etc.), which is fine with me because had they left I would have had to do that anyway and I would have missed a month of rent.
Also, I don't think it's been mentioned yet that raising rents isn't just about cash flow. It's also about increasing the value of your asset. If you raise rents by $50/mo in a 4 unit that's a $2,400 increase in cash flow which at a 10 cap is $24,000 in increased building value. So even if you have to do $3,000 in repairs per unit that's still a 50% ROI just in asset value (before factoring in the increased cash flow).
@Matthew Insley The primary reason M2M is better for landlords is because non renewing of a lease is the easiest/least expensive way to get rid of tenants gone bad. Additionally you will discover that tenants rarely respect a lease. They leave when they need to leave by choice or by circumstance. On term lease they will leave informing landlord they are breaking their lease to the last moment. This will usually result in a extended vacancy. You can build in penalties but their is rarely a fair compensation for the landlords situation. On M2M tenants generally give advance notice since they know they are not breaking their lease.
Bottom line is a landlord having greater control over their property is more important than the false belief that a tenant will respect their lease.
M2M has no downside for good tenants. Offer M2M to potentially bad tenants when screening and they will vanish into the wind. Win/win for landlords
I'm going to give a different perspective to MTM vs long term leases. I used to share @Thomas S. ' thoughts and still do use MTM's in lower income areas. However, I have found that in better areas where you can attract tenants with good credit and long term employment, long term leases are a great tool. I rarely have tenants break leases and when they do they are required, as stated in said lease, to pay one month fee for breaking the lease. Tenants with good credit are just like you and me....they honor contracts and pay the fee. But folks with bad credit and spotty or no employment have nothing to lose by breaking the lease, so I agree that when those are the only tenants you can attract MTM is more advantageous.
Long term leases are a great tool for a few things. It allows the landlord to better plan for vacancies. 45 days prior to lease expiration I hang a notice on the tenant's door offering them 4 options: 1 year lease renewal, 6 month lease renewal, MTM lease renewal, and non-renewal (meaning they are giving their notice to move). This is also a great way to raise rents without directly calling it a rent raise. For instance, at one of my complexes the old rent is $489 for a one bedroom. Current renewals are going up as follows: 1 year: $499, 6 month: $509, MTM: $519. No where does it say rent raise, it just gives them options and they have to pick one. Anecdotally, about a third of the residents pick the 6 month or MTM options again and again. In other words, they are voluntarily paying higher rent and still not moving. This is a 64 unit complex, so the small increments add up!
Your money is on the line, and if rental rates in your area are higher than the rent you are charging your tenants, you are losing money. Speak with your tenants, explain this to them, & if they are uncomfortable paying more they will have to find another place to rent. I know this is rather blunt, but you have to be comfortable with uncomfortable situations at times as a landlord.
One thing I do when I raise my rents, is that i offer to repaint the unit, or upgrade the property in some type of way. It's a win, win because you can deduct the cost of the upgrades at the end of the year, you force appreciate your property. Your tenant will also feel like you are giving a plausible reason for raising the rent & giving back to them.
when I first bought a fourplex I was scared to raise rents because I was afraid my tenants would move out. So I didn't raise rents. Guess what some of my tenants did? They moved out anyway. So I didn't help myself.
Now when I put an offer in on a new building and I see the rents are below market value I make the offer also include the current owner sending out rent increase letters before the close. Before I own the building the tenants already know an increase is coming. So far these increases have been $50.00 per unit.
I have not had one tenant move because of an increase of $50.00 when I purchase a building. These tenants that are $100.00/$150.00/$200.00 below market rent know that they are getting a bargain and they are expecting the rent increase as soon as they hear new ownership has acquired the building.
And even after the increase they are still getting a tremendous bargain because they also are getting a landlord that fixes issues and takes care of the tenants.
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