Raising rents on long term tenants?

18 Replies

 I wanted to get some opinions on bringing rents up to market value. I’m closing escrow on a 4 Plex next week and there are two long-term tenants who are paying $995 per month.   They have both been there for over 5 years. Market rents are now $1300-$1400 per month.    I keep going back-and-forth with trying to decide what the best approach would be. A part of me would like to bring them up to market rents right away but then I risk the chance of one of them leaving and having to deal with turnover right away.   Is it better to do a small increase and increase my chances of them staying?

I have a similar situation. I opted to go with the low rent, but guaranteed income and 0 head aches. I would keep them on a month to month , but suggest a $150 rent increase during your initial call. Give them 60 days notice.

If they don’t like it, meet them in the middle at 100 or 75. If they are 0 hassle then I would keep them even though it’s below market rent.

Originally posted by @Isaac Hebron :

I have a similar situation. I opted to go with the low rent, but guaranteed income and 0 head aches. I would keep them on a month to month , but suggest a $150 rent increase during your initial call. Give them 60 days notice.

If they don’t like it, meet them in the middle at 100 or 75. If they are 0 hassle then I would keep them even though it’s below market rent.

I would recommend looking at the hassle of finding a new tenant in comparison to the cashflow lost by not increasing rents to at or near market rate. If you go with $1,150 and the market is between $1,300 - $1,400, you are leaving $3,600 - $6,000 per year on the table. What are the rents at for the other two units? 

Like Josiah already mentioned you would lose a considerable amount of money if you keep the rent below market value. How easily can you find new tenants if the existing ones vacate the property?  Or you should have a discussion with the tenants and to raise the rents to the current market value. You cant be losing fair money like that imo! Good luck!

Thanks for all the insights on this topic. The other two units are renting for $1300 a month and they signed the lease agreement last January.   I feel like it would be fairly easy to get somebody in there paying $1400 a month.   It’s definitely a lot of money to be leaving on the table if I don’t do a significant rent increase. I guess I just need to view it as a business and not sympathize for the long term tenants.   If I am $200 short on each unit stats $4800 a year in lost revenue. I don’t think the turnover would be half of that. 

Even if you raise the rent close to market, is that still incentive enough for them to move? Moving isnt ever fun. Can they find something as nice or nicer for the same price or less?

@Joshua Elizondo agree with what has been said above already with a smaller incremental raise if you want to keep the current tenant. What you can also consider is asking if they have any current issues with the apt. If they do, depending on what they are and potential cost to fix, maybe you can implement an increase while lettIng them know you‘ll fix some things you would’ve fixed any way if the tenant had decided to leave. Ton of creative options.
@Joshua Elizondo look at it from the tenants' perspective: Yes, they're not going to be happy their cushy little number is coming to an end. They might even be so annoyed that they tell you they're going to move out. Well, if you are increasing your rent to market, then what do you think thyre going to discover when they start looking for a new place? "Oh, look, it seems that everyone is charging $1,400/month"! Maybe this place isn't so bad after all"! Nobody wants to move all their cr ap to somewhere else and still pay the same rent. Worst case scenario is that you increase your annual income by $4,800. If you aren't willing to make the hard decisions now at the beginning of your real estate investment and career, then you're sure going be leaving a hell of a lot of money on the table during that time!
@Joshua Elizondo I just went through this mistake. Tell them now that rent will be $1350/mo starting May 1st. We have long term renters and didn’t raise rent enough, they’re staying there, pay early, are great tenants, but we’re missing out on $400/mo cash flow because we weren’t aggressive enough. Offer them a 3yr lease option that still locks them into a ‘safe option’ but gives you better cash flow.

@David Cruice  hearing your response definitely helps out. I know I have to come in and raise them as close as possible to market rents. I’m a new landlord so once I get over sympathizing for the tenants and treating it like a business I think I’ll do much better from a numbers standpoint.  Thanks for the insight

It is difficult to advise since you do not have a business plan yourself. Asking others how you should manage your business is a mistake.

First you must realise that the purpose of investing is to maximise your income. Supplementing your tenants rent is charity not business. Tenant turn over is a normal part of business and when done properly is cost effective and usually results in a better tenant that is prepared to fully support your business plan by being able and willing to pay market rent. Any tenant that is not paying full market rent is a bad tenant that is having a direct negative impact on your business. 

Give notice to raise to full market and if necessary find better tenants.

Business or charity.... being afraid to operate your business to it's full potential is not a good start. Make your decision now as it will set the path for your future.....business or charity.

I have had a similar situation and opted for a gradual rent increase.  My tenant is extremely low maintenance.  She was renewing for a third year and has only called me twice in the prior two years for maintenance issues.  For me, that is worth a lot.  But the spread between current rent and market rate is my case was not as large as yours.  If you think they are great tenants, I would probably try a $150-200 bump which is still a great deal for them.  If they leave, then raise to market value.

I've seen similar questions like this asked quite a few times. I think it always depends on how quick you can get a new tenant. That is a ton of money below market value. Raise the rents to market value at the end of their lease. Give them a 60-75 day notice. You're talking about $9k a year here! Buy and hold is long term. So start thinking long term. $800 a month below market for both units?! Turn the units over if they leave, spend the money now. It isn't going to be cheaper in the future to turn over the units. Then, sit back for the next 5 years and collect way more passive income. 

@Joshua Elizondo I would suggest raising the rent gradually for the long term tenants. As previously stated also be sure the property is updated. I recently took over a property from my grandparents. I let the tenants know that the rent would be raised over a 2 year period. I advised them up front and didn't hit them with it all at once. This actually helped me build rapport with my tenants. Since I once was a tenants, I did underatand that the $400 increase definitely does impact someone if done unknowingly. That was 3 years ago. Those tenants still pay on time now. They've referred others to me because of they way I handled the situation.