My SFR in south Denver currently rents for $2,300/month. My tenant (single professional) has occupied the home for a full 2 years now. She has been a A+ tenant. Always pays rent 2 weeks early and extremely low maintenance. When her original 12-month lease expired, she wanted the option of a month-to-month lease because she has plans to eventually move back to her home state. I agreed and she has been on a M2M lease for the past 13 months.
I continue to notice very similar SFRs in my community pop up on Zillow for rent well above $2,300. For example, my next door neighbor just posted their house today for $2,700. Obviously, my goal is to keep up with market rents without upsetting a very good tenant. What's the best way to handle this?
My gut tells me to send her a letter next month explaining the situation and propose a $200/month rent increase effective Jan 1st, 2019. I feel like this is more than fair and gives her plenty of time to prepare. Is this a good idea? Why or why not??
I try not to let rents get more than 10% below market rate. In your case, you could "reward" the tenant by telling her you want the home on a one-year lease but will leave the rent at $2,450 which is a $3,000 discount for her. She can take the deal, rent from someone else, or move out of state. You've been more than generous already.
In the future, you may want to consider sticking with a one-year lease and hefty fines for early termination. If a tenant wants to rent month-to-month, allow it at an increased rate. Depending on the strength of the market, I will charge 15 - 25% more for a month-to-month lease to mitigate the increased risk of departure under less-than-ideal circumstances.
I agree w the comment. Also, I try to implement rent increases when tenants are asking to switch to M2M. It’s the perfect time because they are already basically telling you they’re thinking about renting elsewhere at some point.
@Nathan G. & @Mark Hughes - Thank you both for your opinions! That makes perfect sense to increase the rent amount on a M2M lease. I guess I've always wanted to be the "nice guy" landlord. Well, I'm finally figuring out that being a nice guy is costing me several hundred dollars a month! I like the idea of offering her a "discounted" rate of $2,450 if she signs another 12-month lease. Worst case scenario, she chooses to move out and I find another tenant for $2,700/month! I think I could live with that :)
60 days is more than enough notice for a rent increase. They don't need 4-6 months. They will know quickly and either adjust or find a new rental.
@Nathan G. - Thanks! I agree. It's nice to have a second opinion that my proposal will not be unreasonable for my tenant.
I was struggling with this exact scenario in CA. My property is renting for $1645 since 2012, and current rents according to rentometer are closer to $2100. However, I just found out that in California, you can't raise rents by more than 3% per year! Dang it! Thanks for the wonderful suggestions though. I was being too nice as well. I have to remind myself that this is a business!
I really liked @Nathan G. 's suggestion to discount rents by 10% to "justify" the rent increase. I guess I will just let my tenets know that I will start increasing rent 3% per year and cap it at 10% below market.
@Frankie Woods - Glad to hear my thread helped another BP member! I'm currently preparing a letter to increase my tenant's rent effective Sept 1st. This is something I'm going to keep a close eye on in the future.