To Raise or not to raise?

Question

So I am analyzing a deal on a property and notice that a lot of tenants are subsidized and I want to move away from that and think the property could support higher rents. Is there a best practices when raising rents and non-renewing tenants? The current CAP is at 5.8% but with the increase could be closer to 9%.

Thomas S. · Answer

My approach is to rip the band aid off in one move. I would give notice to raise all tenants rent to full market, assuming your landlord tenant regulations allow. Giving all 60 days notice and require a response as to what they plan to do...stay or go. This allows those to leave a reasonable time frame and gives you the heads up on advertising vacancies.

The majority will stay and you can spruce up some units as they turn over. The major down side with a slow increase is that you end up having tenants that can not afford to stay hanging on with late payments, non payments and ultimately evictions.

I prefer to force them out quickly and move forward with the least amount of drawn out drama.

John Warren · Answer

@Gregg Hull this is a very common issue to run into when doing a value add play. I am about to run through this myself with a 19 unit apartment building. You have to take this case by case. You should know pretty quickly which tenants are nice folks who you can deal with versus the ones that you need to move out quickly. Here in Illinois, I try to avoid evictions as they just cost too much. Instead I try to work with people to get them out. In most cases this has worked out just fine.

If the numbers tell you to move into all market rate tenants, just try to move the property that way gradually over the first year so you don't disrupt cash flow more than you have to.

Gregg Hull · Answer

Thanks @John Warren that seems like the best solution. I am hoping to make an offer this week. We will see!