New Sheriff in Town... too much change all at once??

3 Replies

Hey all, I'm looking into buying a 3-unit multi family home. As of right now, two of the units (a duplex) have utilities covered in their rent. It's a 2br/1bath and a 4br/1.5bath and tenants pay $650 and $550 respectively... that's right, the 4br pays $550, with gas, electric, and water included!! The listing agent said that tenant does snow removal and takes care of the property. From the photos of the place, he keeps the apartment nice and I understand he's a long time tenant. I think he has a some kids based on the photos. I'm going to look at the place tomorrow.

I could either raise the rents super high to cover my utility costs or pay to split the meters for gas and electric and have all of the tenants pay their own utilities. But I still would look to raise the rents closer to meet market demand. Would it be too much change to tell the duplex tenants "Your rent is going up... oh, and also, you're going to start paying utilities."

Any advice from savvy investors would be greatly appreciated :-)

@Michael J. Beasley excellent question. My theory is if the current tenants are good, clean,quiet and pay on time then work with them. Little increases will help build trust and a relationship. Dont let them walk all over you but be firm and fair. You have to weigh your options. If you do a huge increase one may move. Ask yourself how much will you need to invest in that apartment to make it rent able again. It may need 10k of flooring, paint, new kitchen plus you will be down for 3-6 months getting it ready so account for all that lost rent.

Is it worth it and do you have the capital at this time to do that rehab. Thats only a question you can answer but a very valid one. 

Good Luck Michael

@Michael J. Beasley what are your goals? If you invest based on the numbers you will have to speak with the tenant and let them know it's going to get more expensive. Do it politely, but do it. Choose if you prefer to do it over time. This loses you money, but might reduce headache (imagine how happy you'd be for a rent raise, new utility to cover, or whatever every time you turned around for the next 2 yearsOtherwise, tell them you need to get the unit to market rates and they will either stay or go, but then the negotiation is over. They will be on solid footing again and you won't need to constantly bother them with trying to figure out another way to nicely increase their cost :)

Our philosophy is to keep raising the rent by 50% of the gap between market rent and current rent.

Do other similar units include utilities?  Is their utility usage similar to others in the area?  How long have these tenants been in place?

Be very sure you have the right market rent, that you are asking them to pay the same as what they move to, or a bit lower.  Also give them time to make plans.  We normally ratchet the rent up over several months when we acquire a property with a tenant in place.

Better to make needed changes right away then keep dropping little bombs, but be prepared to stick to your guns and face the consequences.

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