Should I keep a good tenant or raise the rent to market rent

43 Replies

I have a townhome which I have had a tenant in for about 6 years.  She is a retired lady on a fixed income and when she got into the house the rent was $1400.  The rents in the area have climbed pretty rapidly over the last few years and market rent is about $1850.  I have been slowly raising the rent on the tenant over the last few years at $50 per year to keep a good tenant knowing I was behind market but didn't want to lose a good tenant by raising it too fast.  

The rent is currently $1550 and the lease is up at the end of July. I talked to my property manager who also agreed market rent is about $1850 based on MLS. They offered the tenant a renewal at $1650 (maybe I got too aggressive this year). This is the first time the tenant has complained about a rent increase and said she could not afford the rent increase because she is on a fixed income.

I am generally willing to accept somewhat below market rent on a house for a good tenant who has been in a house for a long time and shown a good record of being good to the property and paying on time.   My question is at what point is it worth losing a good tenant to get to market rent?

I like to look at the cost of losing one month's rent with a tenant turnover vs. keeping a good tenant that is paying less rent.  An increase os $100/month is only $1,200/year. The loss of one month's rent which is bound to happen with any tenant turnover will cost you at least $1,550.   Keep the tenant.

My vote is to keep her. 6 years is a long time so there are going to be some extra maintenance issues upon turnover as well. However, I do it myself so the less hassle the better. You'd be getting $300 more per month so with PM leasing fees, it sitting vacant, and repairs/wear and tear issues I'd say you are easily in the $2500 range best case scenario. That's more than 8 months before you break even assuming no issues with a new tenant. 

I don't like to see rent more than 10% below market for a good tenant. the additional income is worth taking the chance on finding another one. 

Let her know it's $300 below market and that you intend to increase the rent to market rate. She can accept it at a 10% discount of $1,650 or she can move out within 60 days and you can rent it to someone else.

@Sean O'Lone I put alot of value in a long term good paying tenant. To me, they are the gold standard. I would do what I could to keep her as a tenant. The potential vacancy costs, maintenance costs to transition over to new tenant and the risk of your next tenant being a "problem tenant" are not worth the risk.

Thankfully I have had only good tenants so far and they paid under current market.  I've felt the same at times, should I raise, but I enjoy sleeping well at night, and decided to leave it be.  

You could split the difference and re-offer a $1600 Lease.  

I would consider the cost of updating the home to attract the hire rent and the time it would take to fix it.

You're missing out on about 2K keeping her over the next year, assuming it's vacant for a month and cost under 500 to turnover. You're missing out on 3600 the next year.

Six year tenants are gold mines. Plus they call in Maintenacne less. I’d keep her. Turnover and vacancies are expensive.

I personally don’t like that 10% rule. It would almost definitely cost you more than 10% for turnover (carpet/paint) plus 2-4 week vacancy. After 6 years of her living there you’ll have to spend a fair amount of money making look nice again.

I always prefer to keep the good tenant!

I agree with keeping her. Since she's been there so long and you know she's a good tenant, could you just manage the place yourself? Getting rid of your PM could give you another $150/month, assuming they charge 10%.

So she says she cant afford a rent raise. What that means is you have to decide how much longer you want to recieve the current rent,another two months, another year,another two years, another six years? My outlook would be she is moving you just have to choose when it makes sense for you. She is tellling you her income wont change and you have reached the amount she is willing to devote to rent. Yes you will have turnover costs but you are going to have them eventually. If she was $25 below market it would not be worth pushing but $200? I might back down a little on the rent raise if I wanted to keep her another year but the reality is she eventually has to move.

If they leave you would weigh out how long it would take to recover renovating the property and lost rent during that time.  50/ month will take forever but 300 /month more in rent might be worth it.  It really depends on your goals and needs.

I have 2 houses on the same block.  One moved in earlier this year and pays $1620 the other moved in about 7 years ago and pays $1460.  I typically do a ~3% increase every 1.5-3 years for long-term tenants unless rents are trending down. 

My longest tenant moved in 1984, I inherited them in 1999 at $675 and now they are at $850.  They are in their 90s, so I am having a hard time justifying an increase as I feel a bit of extended familial responsibility after all these years.  Market rent for the unit is around $1000 maybe $1100 with some remodeling. 

Keep doing the ~3%($50) increase each year.  Eventually, it will catch up to the market or they will move.

Originally posted by @Mike Mn:

I have 2 houses on the same block.  One moved in earlier this year and pays $1620 the other moved in about 7 years ago and pays $1460.  I typically do a ~3% increase every 1.5-3 years for long-term tenants unless rents are trending down. 

My longest tenant moved in 1984, I inherited them in 1999 at $675 and now they are at $850.  They are in their 90s, so I am having a hard time justifying an increase as I feel a bit of extended familial responsibility after all these years.  Market rent for the unit is around $1000 maybe $1100 with some remodeling. 

Keep doing the ~3%($50) increase each year.  Eventually, it will catch up to the market or they will move.

We also have elderly tenants (mid 80's) paying $200 below market.  But they were are neighbors who had to sell due to the husband's health, and we love them, so we're OK with it.  I know BP is generally about maximizing income but my H is blessed with a very high paying W-2 job.  We see how hard it is to make ends meet for many of our tenants.  We do increases,  because dues and taxes go up every freaking year,  but we don't jump the rent because the market says we can.  Everyone is different in both what they feel is right and what they can afford.

I'm surprised all the people that say keep her. I'm certainly no seasoned expert but the math just doesn't agree. Obviously, there is a lot of value to keeping her but maybe look at it from this point of view.

What if tomorrow, you HAD to sell. For whatever reason. An emergency maybe.

Would you rather list a rental house bringing in 1150/mo or 1850/mo? 

So here is the elephant in the room. Market prices have returned, and in many cases exceeded, what they were prior to the crash. Prices do not increase perpetually, as the ability to pay will eventually max out (don't forget wages have been stagnant). If this does not happen, and prices continue to increase beyond the ability to pay, then the economy suffers, as money shifts dis-proportionally, and the businesses that go under have a ripple effect on the entire economy, as people begin to lose their jobs. We are entering a risky stage IMO, and REI investors would be wise to take this into consideration.

The gal with the fixed income will have the ability to pay for as long as she lives. Can you say the same for the people who can afford more now? Is that $300 a month ruining your other investments? It is certainly a good chunk of change. How much will you spend on vacancy and repairs? Does this tenant live lightly on the property? All factors to consider IMO. If it were me, I would find comfort in having a couple of stable/recession-proof tenants.

Only you can answer the question for yourself. I think there are pros and cons to all, and it is wise to weigh all of them against your personal goals.  

Originally posted by @Merritt Steinbach :

So here is the elephant in the room. Market prices have returned, and in many cases exceeded, what they were prior to the crash. Prices do not increase perpetually, as the ability to pay will eventually max out (don't forget wages have been stagnant). If this does not happen, and prices continue to increase beyond the ability to pay, then the economy suffers, as money shifts dis-proportionally, and the businesses that go under have a ripple effect on the entire economy, as people begin to lose their jobs. We are entering a risky stage IMO, and REI investors would be wise to take this into consideration.

The gal with the fixed income will have the ability to pay for as long as she lives. Can you say the same for the people who can afford more now? Is that $300 a month ruining your other investments? It is certainly a good chunk of change. How much will you spend on vacancy and repairs? Does this tenant live lightly on the property? All factors to consider IMO. If it were me, I would find comfort in having a couple of stable/recession-proof tenants.

Only you can answer the question for yourself. I think there are pros and cons to all, and it is wise to weigh all of them against your personal goals.  

Good points sir. Although, I'd argue no one is "recession proof". 

But, yes....I agree it is in the math of the things you mentioned. I think the OP is letting the emotional side of his business take over. Which, I'm sure many agree is not hard to let happen. But, you can always lower rent in the case that the market drops. Easier to lower prices than up them. 

It's really a crapshoot either way....as is any investing!

All things considered I would go with the collective here. A bird in the hand is worth two in the bush!

are good tenants that scarce?

Originally posted by Account Closed:
Originally posted by @Merritt Steinbach:

So here is the elephant in the room. Market prices have returned, and in many cases exceeded, what they were prior to the crash. Prices do not increase perpetually, as the ability to pay will eventually max out (don't forget wages have been stagnant). If this does not happen, and prices continue to increase beyond the ability to pay, then the economy suffers, as money shifts dis-proportionally, and the businesses that go under have a ripple effect on the entire economy, as people begin to lose their jobs. We are entering a risky stage IMO, and REI investors would be wise to take this into consideration.

The gal with the fixed income will have the ability to pay for as long as she lives. Can you say the same for the people who can afford more now? Is that $300 a month ruining your other investments? It is certainly a good chunk of change. How much will you spend on vacancy and repairs? Does this tenant live lightly on the property? All factors to consider IMO. If it were me, I would find comfort in having a couple of stable/recession-proof tenants.

Only you can answer the question for yourself. I think there are pros and cons to all, and it is wise to weigh all of them against your personal goals.  

Good points sir. Although, I'd argue no one is "recession proof". 

But, yes....I agree it is in the math of the things you mentioned. I think the OP is letting the emotional side of his business take over. Which, I'm sure many agree is not hard to let happen. But, you can always lower rent in the case that the market drops. Easier to lower prices than up them. 

It's really a crapshoot either way....as is any investing!

(Bolded) Excellent point.

Agreed. Keep her. If the numbers are even close after considering the turn over, why even deal with the hassle?

Murphy will bite you if you lose her, and your next tenant will be a nightmare. 

Keep the tenant.  

She's been there 6 years for God's sake.  If you've got someone living in the apartment with no vacancy loss for 6 years and you haven't had to replace carpets, paint etc..., you've saved money year over year from turnover.

You're going to displace her over a couple of dollars over the next few years (and I say a couple because of the vacancy loss and renovation costs vs the actual dollars collected)? 

@Merritt Steinbach

Very well said.  Even if you're only about the numbers,  this is something to consider.

I feel compelled to say...it's OK to not just be about maximizing profit!   That is truly a U.S.A. phenomenon,  and fairly recent one at that.  I happily live in Germany right now (Husband's job brought us here) because I am more comfortable here where the social contract is very strong.  Not right or wrong,  just different.

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