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

43 Replies

Are you providing her any added value for the rent increase?  I know of one small family who's rent has gone from $1250 to $1850 in  the last 4 years.  Their refrigerator shelving is held together with tape, (that way when they moved in); they bought a stove so they could have more than one working burner, the downstairs bathroom has leaked so much the lino is coming up, the fence is held up with props and the gates are history.  But the landlord sent them a notice that the rent for the next year will be $2250 per month, due to "market rates".    

Market rents are for updated properties with amenities. And for $2250, they bought a home.  When they told the landlord they wouldn't be renewing, he stated, 'wow, I guess I'll have to remodel the kitchen if I want that much rent, huh?"   Had he offered that, they'd have stayed.

My own landlord has held my rent very steady for the last 5 years, despite a major jump in the HOA. I repay him by doing any repairs, and taking excellent care of the property. He could easily get another $300 a month for my place.

I'm in this exact same situation!  I have a property that I'm managing from out-of-state currently rented for $1645.  The tenet has been in the property for 6 years as well.  I raised the rent by 3% for the first time this year (from 1600).   Market rents are at ~2100 which puts me at a loss-to-lease of $455.  

However, I do not have to use a property manager for this property.  I've had to maintenance calls in the entire period for about ~$350.  I haven't had to visit the property.  

I agree with @Mike Mn, if I keep raising rents 3% a year, I'll eventually catch up to market.  Hopefully, I can keep this tenant for the next 10 - 20 years and minimize my maintenance / vacancy costs.  These costs tend to be a landlord's worst enemy.

@Sean O'Lone what are you goals for the property & your portfolio? How many others do you own? Can you find a property nearby to move her into (purchase a cheaper one and move her in)?  

A good tenant is not something you want to lose, but based on the market prices, it seems that by keep her you're losing out on almost two full months of rent every year (based off the 1550-1850 difference).  It may be worthwhile to put her on a MTM lease, and ask for access so you can do an inspection.  That way you can see what repairs may need to be done to get the apartment ready to re-lease, should you decide to remove her.  Additionally, if you see that there are some serious issues, that she is not complaining about, it may be worth it to keep her.

Perhaps @BiggerPockets .com will add a tenant replacement calculator, to help with problems just like this one.

Best of luck!

Keep the tenant!  I have several tenants that I have rented to for almost 10 years.  Nothing is better than on-time guaranteed payments from a tenant who is taking care of your property.  One month of vacancy and turnover cost far out weighs the increase of gross rent income over a 12 month period. Good Luck!

Jared

One in the hand is worth two in the bush.

@Sean O'Lone  Tricky situation you are in here. On one hand, you can realize an additional $2,400 per year with a new tenant ($1850 versus $1650). On the other hand, since your tenant has been in the property for so long, you will likely have significant turnover costs (all new repaint and flooring likely). Rising rents indicate you may be in a Landlord's market so I would be inclined to go all in and raise the rents to Market. If it means losing a good tenant, so be it. 

The math shows to move them out.  If they cannot pay more than $1550 and market is $1850 it would take less than 6 months to make up for a month of vacancy at $1550.  Good tenants are not that hard to find with good screening.

But the heart.  I have tenants I like and their rents get a couple/few hundred below market and then ideally I maintain them there.  However, I have a tenants that are maybe $400 to $500 below market.  It is because I choose not to raise their rent (the tenants I like) more than $100 in a year yet our market rents have increased noticeably more than $100 year over year.  So I wait until the tenants I like are at least $250 below market to raise their rent $100 but the market by next year has moved more than $100.  None of the tenants I like can move out for a better rent value.

My RE has been profitable to me.  I rather loose a bit of additional profit than raise rent more than $100 a year on a good tenant.  Note that the $100 rent increase likely means very close to $100 additional cash flow because my loans are fixed and my prop tax is virtually fixed. 

I would keep the tenant possibly at $1600 but even at $1550.  maybe I will have good karma.  Maybe I am a sucker!

I am glad to see so many responses saying to keep the tenant.  It is not what I was expecting on this site.

Good luck and hopefully if you keep the tenant you get some good karma.

@Sean O'Lone do the math, taking into consideration your turn over costs. There is typically some cost to get a unit rent ready, vacancy cost and leasing costs. I will throw out some hypothetical numbers:

Rent ready costs for minor repairs or updates $1000 (after 6 years a property may need even more than this could be thousands to bring the property up to market quality)

Vacancy let's assume it waits one month so $1850

Leasing costs, typically a PM charges 3/4 month rent, so $1387.50

Total turn over costs would be $4237.50

Let's assume you can keep the old lady if you concede to just a $50 increase, so $1600 rent. That leaves you short $250 per month to market. 

Divide the turn over cost by the monthly rent gap, so $4237.50 / $250 = 17 months. That means it will take you 17 months to break even on the turn over and there is no guarantee your new tenant will stay more than a year or two, so you could be facing more vacancy in the next couple years. Likely the retired lady will just stick around for many more years. Old people don't like to move. 

Assuming she is taking care of the property, I would just give her a $50 increase each year and keep her around as long as possible. But ultimately do the math. 

Everything is situational and unique in real estate. Depending on your property and the market it is in, you may not incur any extra costs or headaches by listing the unit. Who knows, maybe the unit is in great shape and doesn't need much work, maybe it does need work... You'll need to assess the costs of a turnover. If you decide to turn it over, you should time things so that the unit is listed for rent a couple months in advance of lease expiration to avoid vacancy. Even at the increased rate of $1650, you are losing $200 a month in opportunity cost. $2400 of missed income per year is greater than a one month leasing fee of $1850, so it's worth the increase even if you use a leasing agent (which you shouldn't so you can keep that money).  Depending on your market, you may be able to charge a move in fee which will add to your bottom line and offset potential turnover costs. If you plan on selling the property to another investor, you will increase the value of your sale as well by having higher rent in place. Having a great tenant is great, but have you considered the fact that the new tenant might be just as good or better? Properly screen them and you're usually fine.

Basic question.....does ANYTHING you pay for stay the same cost over 6 years? Did all YOUR costs for that unit stay the same over the tenancy? Insurance..... taxes.... utilities/HOA (if applicable)? Probably not...so you are losing more $$ than you quickly calculate in your head....

The majority of things in life go UP in price over years.....so unless the market is in the toilet, the rent price HAS to go up some.... the balance is to increase it enough to do the right thing from a business standpoint....but not enough that the tenants leaves.....to me a $75/year increase is a decent amount but not enough to make most at that rent level leave.....

As for the renovation IF she leaves..... that work is going to happen sooner or later....... so you are deferring costs, not deleting them...... deferred is good, but that $$ is essentially spent one way or another....sometimes the long term tenants cost more because the stuff you deferred is WAY worse now.....so you are going to spend $$ on paint, flooring etc etc sooner or later.....later is better....but its still gonna happen.....

Market rate........ could that tenant rent a place the same size, location and CONDITION that your unit is in right now? Be careful on what you are using as a comparison....for $1800, they may get a much nicer, newer place in a better location.....so why not move?

I am going to bring up a different point and many will find it completely irrational. Is it about the money? If it is, raise the rent and turn it over. 

But....I can tell you that it doesn't always have to be about the money. If one can afford to put a deserving person or family in one of their rentals and keep the rent below market, it is a kind and generous thing. You will always have zero vacancy and your maintenance costs will be lower than normal because your tenants will do what they can on their own to keep the place nice.  Choosing the right tenants becomes a dream as you will always have more applicants than you can possibly screen. I accommodate this by not showing the property, but by scheduling an open house instead. You will know the right tenants right away because they will recognize their fortunate circumstances and will appreciate it.

Your circumstances might not allow for this generosity, especially if you need the extra money to pay your own bills. But if you can do it, even if it is on just one of your units, it is a mighty fine thing to provide a home to someone who could use and deserves the help. If you have been blessed with luck and the right circumstances, pass that on and it will come back to you many times.

If it is strictly about the money, treat it like a business and maximize your ROI. But as you get more successful, remember that the freedom that financial success provides can be used to choose to be generous. Of course you can always keep your rents at market rates and donate to your local homeless shelter. This is just another option.

Thanks for everyone's input.  I have decided to keep the current tenant at the same rent for one more year.  Telling her that she has been a great tenant and I have really appreciated having her as a tenant but eventually, I will have to raise the rent based on my costs increasing.  My plan is to use this year to asses the property for what I will want to do to the property assuming she moves out.  This gives her an opportunity to prepare if she really can't pay more and me to prepare money and planning for any maintenance which will have to occur.  I will probably offer to only raise the rent by $50 for her next year or market it for $1800 next year to someone else. 

Once again thanks for everyone's input.  The variety of views are always useful.

This thread lets me know there are still good people in the world LOL (for those keep the tenant ppl) ...when I was a tenant increasing the rent $1200/annually made me want to leave especially when my place was outdated and new places were popping up with the same increased rent.  Plus I had one year where pay wages were frozen and didn't increase until the following year to a minimum rate. I know its business but I think you have to think of the people in this situation. Keep the good tenant! 

Originally posted by @Nancy P. :
Originally posted by @Mike Mn:

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 like you thinking Nancy! 

If you need the extra amount them let her go, but if you are comfortable keep her. The extra $200 per month is not going to make you rich.
There is a cost with new tenant already mention here on top of that you can actually get one that could destroy your house, or somebody you have to evict. I believe loyalty has a price and a 6 years renter don’t come that easy. Nothing good come from greed and karma will let you know.
Thanks.

I agree with those who voted for keeping a good tenant.

Interesting thread, I had a rental where I owned since 1984, and had 2 good tenants stayed over 10 years, paid below market, and I haven't regretted it.

I bought this house for $70K as a flip, but the flip fell through. So the plan is to rent it without negative cash flow, and wait to the right time to sell it again. The house is 40 minutes drive from me.

For the first 15 years, that was the strategy. Market rents went up from $950/month in 1984, to $2,700 today, but for market rent, the place now needs a new kitchen.

Thinking back, for most of the period, when I was charging below market, happy with a little over break even, market value of the home went from $70K with $10K in rehab costs to $425K now. Also, now it's also mortgage free, the breakeven rent paid it off, so I went from a net value of near zero  (original mortgage was $80K)  to $425K, today not taking cash flow into consideration. For the last 12 to 15 years, I've been cash flowing, with $1,200/month cash flow now even with me charge about $300/month below market currently. 

I had other rentals that cash flow well even though I charge below market as well. So when this one was breaking even, it's OK taking the long view. I self manage up to now, and I don't regret it. 

Looks like a market crash is coming so the $425K market value might go down a bit. But now in retirement, $1,200 month cash flow, even below market is pretty good. With this, I'm not going to worry about the market crash.

I posted a very similar thread the other day, as I have a nearly identical situation I've been debating on. The consensus was to keep the tenant and incrementally raise the rents by $100/yr instead of jumping from $1400 to $1800. Ease the tenant into the market rent.

If I do a huge increase I'll lose the tenant, so that means at least 1-2 mo vacancy most likely. I'll have to do some repairs and cleanup since the tenant has been there 7 years, so I had figured at least $10k in work (paint, carpet, etc). So, it could cost me ~$13k to get ~$5k more in rent per year...2.5-3 years to make it up. Not to mention the time, hassle, and stress that accompanies unit turnover. 

Also, in my opinion I think there is a huge value to a good, long term tenant. They make life sooo much easier. Not raising the rent on my tenant has been sort of a "reward" for her loyalty and good tenant behavior. 

I say keep her.  

" Your income is determined by how many people you serve and how well you serve them." -- Bob Burg

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