Raising Rent on Inherited Tenants

2 Replies

Hello BP,

I currently own two 4 unit buildings.  Both buildings came with inherited tenants, and lower than market rental rates.  My initial intention was to clean up units and raise rents as tenants move out, but I haven't had much unit turn over. 

The rents range from $600 to $750 per unit and I'd say that in general the rents are at least 10% - 15% ($75 - $100 / unit) under market. I'm trying to avoid a drastic price hike fearing most the tenants will walk. Most have been in place a long time, don't cause trouble, and pay on time. I'm thinking they've been there so long because of the attractive rental rates. Also, those units were the tenants have been the longest will need the most work to bring back online once they leave.  

I feel like I'm caught in a catch 22. I'm leaving allot of money on the table monthly and annually, but if I try to recapture the lost dollars too quickly I expect I'll  be forcing out quality tenants and face updating costs and vacancy.  On the same note I did experience a pretty substantial tax and insurance hike this last year so I absolutely need to do something.

The last Podcast with Bruce Peterson had me thinking. He was able to raise rents up a couple hundred dollars in a few years. 

If this where your situation what would your strategy be. I'm thinking of doing a $25 increase on rents this year across the board and trying the same next year. Thoughts? 

Let me know BP Community!

Thanks in advance. 

We had this same situation with our buildings. We had great tenants who pay on time every month, and we didn't want to encourage them to go. But then we realized, where would they go? Even with the $25 increase, our apartments were still at the low end of market or below. There isn't anyplace else in our area that's as nice for less money - most are more. This year, not one of the 21 tenants we raised the rent on said a single thing. A couple have in the past - my husband's response when they called was, "Are you giving me your 30-day notice, then?" They always quickly said no! And we never heard a thing from them afterward. They're still with us now. We're guessing they might have looked into what's available, and found nothing cheaper.

In our increase letter, we always note that our costs are rising (usually property tax), and that like any other business, we must pass those costs on to the consumer.

TL;DR: A $25 increase is more than fair. Raise the rents every year until you're at market. If they move, that's your chance to make improvements and raise the rent to market.

We purchased a 4-unit building, 75% occupied.  The vacant unit was nice, but part of our strategy is to be at or near market rent, with nice places people will stay at, until they want to leave (but for no reason of our own).  Again the vacant Unit was already nice, but there were just some things missing, like the prior owners replaced the kitchen countertop, but left the cabinets as they were.  They had bee painted a few times, and were an off or aged white.  They showed their age next to the new countertop, faucet, and sink.  

We:

  • Refinished the kitchen cabinets with a modern gray, replaced hardware
  • Painted the kitchen and bathroom
  • Added vanity and new faucet in bathroom, replacing a wall-mounted porcelain sink
  • Refinished the bathtub and shower surround
  • The resulting unit was better than anything else in this working class neighborhood, matching the quality of nearby slightly more expensive town center (mall, restaurants, etc.) neighborhoods.  It would support higher than fair market rent, we hoped.  

We notified the existing tenants of the change in ownership, and informed them of the rent increase, about $65, starting 2 months out, stating it was fair market rent, which was true  We stated we would make improvements to their Units, like above, with the exception of painting and refinishing of cabinets (too invasive for an occupied Unit), as well as repair any issues, like slow drains, which was found during the building inspection. We also gave them the option to move into the new renovated unit for $90 more.  No one moved to the vacant unit, but they renewed their Lease, 2 tenants month-to-month, and 1 tenant for 1 year.  They allowed us to work and might slight renovations like above, in their Units while they occupied them.  

2 people soon left a couple of months after the Rent increase, to move out of state.  That left us with one original tenant, under a 1 year Lease.  We rented the inherited and now renovated vacancy slightly above market (nothing else this nice in the neighborhood, so we were above the price of other listings).  We then renovated the 2 newly vacant units, rented one (also above market), and the other will be listed soon (just finishing that Unit's renovation).  We expect to rent the last one above market as well.  For the original inherited tenant who's lease will come up for renewal again later this year, we may raise the rent there $15, still $10-15 less than the others.  

This has worked for us so far on this, our first building - Renovating and raising to market, or slightly more to get the most out of the investment. We were not so worried about investment return on the repairs, but didn't go crazy. We tried to keep purchase price and all-in repairs, within 70-75% of what we expect the appraisal to come back at, when we cash-out refinance. We are expecting to complete BRRRR. One thing I would do differently, is move faster with the renovations once they were vacant (we did some work ourselves, and let it take too long - other life events), and not have more than one vacancy at a time (costly).

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