Trying to determine if it makes sense to raise rent

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Trying to determine if it makes sense to raise rent

Peter StewartBusiness Member
Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes

I am determining what to do with a townhome I own in Inglewood, CA, and would love some input on my situation.

The property has been a rental for me since January 2011 and I've had the same tenant the entire time. She's always been great so I've never raised the rent ($1400). I self manage the property and I moved to IN in 2014, so I'm managing it from a distance. I've been hesitant to raise the rent because I'm pretty sure I'll lose my tenant, and dealing with a vacancy and turnover from afar will be a real pain.

I am pretty confident I can get $1800/mo. MAYBE $2000 if I put some $$ into the place (it's in decent condition, but could use bath/kitchen updates). However, if I turn the unit over I am estimating having to spend at least $15k cleaning the place up (new carpet, paint, misc fixes and updates) if I want to get that rent. Would probably have to spend $60-70k to get the $2000. I'll also have to hire a property management company to rent the place out for me and manage it going forward (so, 10% there).

Here's the math I'm looking at:

Current annual gross rents: $16,800

Projected annual gross rent: $21,600

Management fees (10%): $2,160

Net: $19,440 = $2,640 increased annual revenue

If I am spending $15k, it'll take me ~6 years to make that income back up. Sure, my monthly cash flow will appear to increase by $220/mo, which could increase my purchasing power (a strong positive), but I'm not sure if it's a wise investment. 

One way I look at it is this - spend $15k to make $2640/year, which is a ~17% return. 

But, could I put that $15k into a different property and make more with the $$ long term?

Any other thoughts? Am I missing anything in my analysis?

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
8y

@Peter Stewart Why not do an incremental rent increase (3 to 5%) now and every 12 months to try and hang onto current tenant until you sell and do the 1031?

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  • Peter StewartBusiness Member
    OP
    Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes
    8y

    One thing to add that is complicating things - I'm considering using that property at some point to do a 1031 exchange. If I do a 1031 in the next few years, I'll totally renovate the property prior to sale, so any money I put in now may be a waste. I have a ton of equity in the property and I'm getting about a 3% return on it. But, I do use a large HELOC on the property to fund flips, so I do get some benefit from that equity that's not factored into that return.

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  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    8y

    @Peter Stewart Why not do an incremental rent increase (3 to 5%) now and every 12 months to try and hang onto current tenant until you sell and do the 1031?

    1Reply
  • Nicole A.Pro Member
    Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes
    8y

    If you can spend around $15K to get around $1800/mo compared to $60-70K to get "MAYBE" $2000/mo, I would def take the first choice of the two. If the place is in decent shape, why would it need $60-$70K dumped into it?

    Your tenant hasn't had a rent increase since 2011. Why do you think she'll move if given an increase? Have you or the PM discussed it with her? Perhaps raise the rent to $1500 now (assuming she's month-to-month and there isn't the rest of a lease term to honor), and talk about raising it to $1600 the year after.

    This would get you more income without any rehab/vacancy costs. Hopefully she understands her rent is likely to go up (along with moving costs to pay for) if she moves over a long-over due rent increase.

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  • Ray Harrell
    Investor · Chicago, IL · Member since 2016 · 1k+ posts · 930 votes
    8y

    I would wait until your tenant leaves before making those kinds of improvements. As you said, it would take 6 years to realize the returns. Not worth it in my opinion.

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  • Peter StewartBusiness Member
    OP
    Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes
    8y

    Thank you for the input @Nicole A. I think she'll move because I've had to work out payment plans with her a few times when she struggled to make the $1400 payment. It is just an assumption though, so it's possible she hangs in there. I have not had any discussions with her about it yet.

    I didn't consider doing gradual increases, but that could be a good option. A lot less painful on her end so she's more likely to stay, and if she does, then I don't have any additional expenses. 

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  • Peter StewartBusiness Member
    OP
    Real Estate Broker · Indianapolis, IN · Member since 2018 · 160 posts · 168 votes
    8y

    Agreed @John Underwood. Might be the best route to go. I am an all or nothing guy most of the time, so I wasn't considering the gradual increase route. 

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  • Clarence Johnson
    Real Estate Agent · Inglewood, CA · Member since 2015 · 294 posts · 150 votes
    8y

    @Peter Stewart  $1400 is 1 bedroom rent in Inglewood right now, you could probably pull off $2000-2200 for a 2/2 depending on the area and int/ext condition.  The $60-70k rehab estimate seems high as I'm shopping for an Inglewood condo and some of the worst 2bed 2baths in the city wouldn't require over $20k in repairs/upgrades.  Hell, for the right price and in the right part of Inglewood I may make you an offer you can refuse.  If your considering raising rents by a large amount, maybe you should wait until the end of the year as an eviction could possibly push you into winter, where your pool of potential  good tenants will be low.  If your only raising rents 3-5% then a small lifestyle change on your tenants part (cable, pets, vices) could likely account for the increase.  Let me know if you consider selling, even if its not for me condos are moving fast here.

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  • Marissa Carroll
    Shawnee Mission, KS · Member since 2016 · 62 posts · 25 votes
    8y

    Just my two cents as someone who has rented for the past 11 years. Never has a year passed that my rent hasn't gone up. I expect it to. It's usually not much, about the inflation rate for the previous year... sometimes less. Last year was 2.6%. I would raise it incrementally from now on if I were in your shoes.

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  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Renters fully expect their rents to rise every year - so don’t disappoint them
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  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    8y

    Your rehab estimates are astronomical. $15k for carpet, paint and cleaning?? That is carpet, paint, cleaning and half a bathroom gut. For $60-70k you're talking about gutting the entire thing. If there is nothing major that needs to be done, $5 - $10k max to get it ready for another tenant. If you bump rent to $1800 then you're getting your money back after 1 to 2 years max. If it is completely outdated and you need new bathrooms and kitchen on top of the basic stuff, you better be getting great ROI before you drop that kind of money. Either way, raise the rent. Her having financial problems stinks but you aren't a charity (if you are, I'll give you my address). Everything costs more in life unless you live on a barter system. I would give her the option of getting the place refreshed and having $1800 rent or leaving it as is and going to $1600.

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  • Heather Swope
    Rental Property Investor · Plainfield, IN · Member since 2018 · 16 posts · 8 votes
    8y

    I have a tenant who  has been in one of my SFRs for 2.5 years without a rent increase (she's been month-to-month for a  while now). She now wants to sign a multi-year  lease. I definitely won't  let  her stay there for the same rent. When she signs  the new lease, I want to increase  the rent by 3%, and I also want to include  some language for automatic annual rent increase since it will be a multi-year lease.  I'm not sure how to include  this annual  increase verbiage in the lease.  I found this online, which looked reasonable:

    Rent Increase. The minimum rent shall be increased on January 1st of each year, beginning January 1, ____. The minimum rent shall be increased by the annual percentage increase in the United States Bureau of Labor Statistics, Consumer Price Index for Urban Wage Earners and Clerical Workers, Midwest Region All Items, as of October 31 of each year times the prior years annual minimum rent. Each year's rent increase shall not exceed four (4%) percent of the prior years minimum annual rent.

    Does this look reasonable? Does anyone have any other examples of annual rent increase verbiage?

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    In your position I would look at selling the property now in it's present condition and do the1031 exchange. If not there is not much point in doing a reno now and then redoing it in a few years to sell.

    You do not provide any info on the value of the property but suspect that it's value may be far beyond what would provide descent cash flow even at 2K rent.

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