Best way to raise below market rents on newly purchased property?

22 Replies

Hello everyone. I am under contract on a duplex in a good area of Springfield, Ohio. Current rents are well below market @ $460 and $500 a side. The exterior of the property is in excellent shape but the interior does need some cosmetic work. The tenant paying $460 a month has been there for over 14 years and is month to month. The tenant paying $500 a month plans to move in June, shortly after we close on the property. Market rent in this area is $650-$700 a month for each unit. Obviously if the one tenant moves out after closing, renovating that side and increasing rents will be easy. What would everyones advice be on increasing rent for the tenant that has been there for 14 years. Increase it all at once or slowly over a few years? Keep in mind it will be difficult to do any renovations while the tenant is living there. Thanks in advance for the advice. 

I am not talking from experience but I would probably give the tenants a 3 month notice of a rent increase and raise it to $575.  They won’t be able to move because you are still under the other rents in the area. Then after a year and renting the other side you can determine if you want to increase the rent again.  Sometimes long term tenants are better than making an extra $50/month.

I would make sure you get a letter from the other tenant that is planning to move their intention and the date their moving. You may want to give them the rent notice too Incase they decide to stay.

I am in Springfield as well. $700 is hard to get for your typical half-double (unless you are in a desirable end of town, and have AC and off street parking).

I would work with them and offer to renovate the unit in exchange for higher rent. Once you are the owner, resign your month to month lease with them. State your conditions there. As per our lease we increase rent every year, a few (3-5) percent per year..

For the tenant that is staying, increase the rent by a small amount. Check if there are limits on how much you can increase it by and if there aren't, increase it to $500.  

Think about how much you'd have to spend to get it up to market value vs the extra rent.  Renovating it and spending $5K (making up a number) to get an additional $200/month means it will take a minimum of 2 years to recoup the costs and that doesn't factor in lost rent or any other expenses, so it will be longer than 2 years. 

Originally posted by @Thomas Guertin :

I am not talking from experience but I would probably give the tenants a 3 month notice of a rent increase and raise it to $575.  They won’t be able to move because you are still under the other rents in the area. Then after a year and renting the other side you can determine if you want to increase the rent again.  Sometimes long term tenants are better than making an extra $50/month.

I would make sure you get a letter from the other tenant that is planning to move their intention and the date their moving. You may want to give them the rent notice too Incase they decide to stay.

 You bring up very good points and I think a fair notice, and a gradual increase is probably the way to go. Getting a letter from the other tenant that plans to move is a great idea and something I was considering. Thanks!

Originally posted by @Stas Solomon :

I am in Springfield as well. $700 is hard to get for your typical half-double (unless you are in a desirable end of town, and have AC and off street parking).

I would work with them and offer to renovate the unit in exchange for higher rent. Once you are the owner, resign your month to month lease with them. State your conditions there. As per our lease we increase rent every year, a few (3-5) percent per year..

I know you know the area. This is on the north end of town. $700 is on the high end but $650 is market rent. I definitely plan to sign new leases. If the tenant is easy to work with I may consider doing some light reno while they live there. Good to know regarding your annual rent increases. That is something that I have not been good at. Do you sign new leases every year or let them go month to month after the first year? 

My approach is to maximise returns as quickly as possible. Because you have one tenant moving shortly after taking ownership this is a good situation. I assume, based on below market rents and renovations required, you have built this into your purchase price. One unit will be up to full market rent quickly maximising your long term returns. Renovating for 5K and increasing rent by $200 is a incredible return on investment.

My plan would be to get the second unit vacant and renovated as quickly as possible after the first. The reno cost is a solid investment where as having rents below market is a liability. The sooner you replace the tenants the sooner you maximise your returns. Do not delay maximising long term returns. 

Your business should not operate based on doing nothing, the sooner you take action the quicker you force equity and income growth. Minor rent increases over a long period is not a positive move forward it is simply supplementing your tenants rent at your expense. If you have built the money into your business plans to reno and maximise rents the sooner you do it the better.

Originally posted by @Theresa Harris :

For the tenant that is staying, increase the rent by a small amount. Check if there are limits on how much you can increase it by and if there aren't, increase it to $500.  

Think about how much you'd have to spend to get it up to market value vs the extra rent.  Renovating it and spending $5K (making up a number) to get an additional $200/month means it will take a minimum of 2 years to recoup the costs and that doesn't factor in lost rent or any other expenses, so it will be longer than 2 years. 

 Theresa, very good points. After all, it is a numbers game. Thank you. 

Originally posted by @Thomas S. :

My approach is to maximise returns as quickly as possible. Because you have one tenant moving shortly after taking ownership this is a good situation. I assume, based on below market rents and renovations required, you have built this into your purchase price. One unit will be up to full market rent quickly maximising your long term returns. Renovating for 5K and increasing rent by $200 is a incredible return on investment.

My plan would be to get the second unit vacant and renovated as quickly as possible after the first. The reno cost is a solid investment where as having rents below market is a liability. The sooner you replace the tenants the sooner you maximise your returns. Do not delay maximising long term returns. 

Your business should not operate based on doing nothing, the sooner you take action the quicker you force equity and income growth. Minor rent increases over a long period is not a positive move forward it is simply supplementing your tenants rent at your expense. If you have built the money into your business plans to reno and maximise rents the sooner you do it the better.

Thomas, yes light reno was worked into purchase price. So basically your advice for the long term tenant is to increase to market rent immediately and they will either pay it or move? If they move we can start reno immediately. If they stay..they stay. Win Win. 

When I purchase a new multi-family and meet the existing tenants it's been my experience most of them will complain to me about something that needs fixed/upgraded. 

When it's an upgrade (typically painting, flooring, windows or something as simple as a new toilet) I ask this simple question: "If (upgrade) was done how much higher would you expect your rent to be?"

The tenant will either answer or say, "I don't know." 

When they give me a number and it's suitable I say, "I can upgrade _____ for you but your rent would be (stated amount said by tenant/a higher, realistic number) per month." 

You would be surprised by how many tenants, percentage-wise, are fine with that rent bump if they get what they want. And since it's my property, this upgrade (which is often justified and a good idea) is adding value to my property and the tenant is paying for it. 

It's bumping the rent, adding value to the property and the tenant not only tolerates it but loves it as they see their higher rent going to work for them (and you as you're improving your property). It's good for tenant retention, especially in a softer rental market. 

Try it and let me know how it works for you. 

@Branden Drake

If they stay..they stay. Win Win.

Absolutely best business move especially when dealing with inherited tenants below market. If the investor has not built this into their investment plan they are not taking advantage of the reason they purchased the property.

 I don't believe it has anything to do with having a vacancy, that is simply a lame excuse to cover up the fact that they are too soft to efficiently operate the business. The are soft and lazy. As a result long term they lose more money than immediately taking action.

If they do not have the money to put the tenant out and renovate to raise rent to full market immediatly they entered into the investment with the intent of losing money. This is not an approach to investing that I understand.

@Karl B. Interesting strategy. Thank you 

@Thomas S. I think this is the more difficult strategy for some but I get it. At the end of the day, I did go into this deal with the intention of getting market rents sooner than later. Thank you. 

@Branden Drake I was in this same exact situation in February. The tenant has been there for about 10 years and was paying 417a month with market rent at 700-750.

After closing on the property, and before I went to go over the lease with the tenant, I typed up a rental increase schedule starting the rent would raise by 100 per month until it reached 700. When I went and met with the tenant I explained the situation to him and we each signed the rental schedule increase. He understood that he was paying below market and didn't have any intentions on moving out.

Hope that helps.

@Steven Pool great real world example. Thank you for sharing your strategy.

@Steven Pool

Rather than raise the rent immediately to full market, on a tenant that had no intention of leaving,  you choose to spread the increase over 3 months. This cost you $300 + in lost income. Was there a business reason behind this decision or was it just a gift you were offering the tenant.

Originally posted by @Thomas S. :

@Steven Pool

Rather than raise the rent immediately to full market, on a tenant that had no intention of leaving,  you choose to spread the increase over 3 months. This cost you $300 + in lost income. Was there a business reason behind this decision or was it just a gift you were offering the tenant.

 Great question Thomas. The reason is that when I closed on the property it was in the middle of February in northern Wisconsin. This is relevant because quickly finding quality tenants in the area during this time can be difficult. Coupled with the costs of turning over a property, and having a vacancy for an indeterminate amount of time contributed to my decision to go this route. These, I feel, are all legitimate business reasons. 

Could I have maximized income by immediately increasing the monthly rent, yes and he could have just as easily decided to move out and I would be dealing with all of the above. 

@Branden Drake

Congrats on the property! In my mind, it really depends on what your intentions were going into it. If you know that rehabbing and getting new tenants for both sides is much more profitable and that’s your intention, then stick with it.

However, it might be cheaper to keep the one tenant there with gradual rent increases, if they don’t insist on your doing a lot of work to their unit.

Originally posted by @Branden Drake :
Originally posted by @Stas Solomon:

I am in Springfield as well. $700 is hard to get for your typical half-double (unless you are in a desirable end of town, and have AC and off street parking).

I would work with them and offer to renovate the unit in exchange for higher rent. Once you are the owner, resign your month to month lease with them. State your conditions there. As per our lease we increase rent every year, a few (3-5) percent per year..

I know you know the area. This is on the north end of town. $700 is on the high end but $650 is market rent. I definitely plan to sign new leases. If the tenant is easy to work with I may consider doing some light reno while they live there. Good to know regarding your annual rent increases. That is something that I have not been good at. Do you sign new leases every year or let them go month to month after the first year? 

You don't need to resign the entire lease every year, simply do an addendum and have them okay the same terms of previous lease. We don't do month to month, our shortest lease is 12 months. Gives us more control.

I’ve done it both ways.  Depending on other factors pushing straight to full market value (for the current condition of the unit) is the best way to go.  It doesn’t have to be that month. But it should be within the first 90 days.  

Like @Karl B. I’ve gone in and asked if there were any issues they had with the property.  I didn’t ask them what they thought they should pay more.  It was just more all part of the conversation.  I knew what I was raising the rents to already. From 600 to 700 on lease renewal, I do 12 month leases. 

But after initial lease signing if they stay after year one I only raise it a portion of the difference between market rent and their current rent.  Turnover is more costly then giving up 15-25 bucks a month. I have a good track record of renewals using this method.  Plus I show them that moving is more costly long term and short term then it is to pay the little bit more.  

@Branden Drake I would suggest getting all the renovations done and raising the rent as soon as possible. Stabilizing this property now will free up your schedule to search for more, if you're looking to scale. I'm currently working on a renovating of a vacant unit... it's taking too long and costing too much. So now I'm in the position where I am managing the property, renovating the property, and searching for more property. I'm stretched pretty thin with three kids and a full-time job lol! Best of luck!

Last year, I bought a mostly vacant apartment building.  Two long term tenants remained.  I left them alone while I renovated the building.  One tenant I will jack the rent up.  The other, I will slowly increase over 3 years because I want to keep them.

Maybe I am soft and lazy (I'm definitely lazy) but I inherited a tenant who is paying below market rent in a property I purchased around Christmas time last year.  The tenant is 86 years old and he's been living there for at least 7 years.  The property has 5 units and cash flows well even if one of the tenants is below market. Maybe after I own the property for a year I will increase his rent a little, but I didn't feel like I needed to immediately jack up the rent on an 86 year old man because I don't have to eek out every last penny I can from a loyal tenant who pays on time every month and doesn't cause me too much drama. Sometimes there's a reward for living to be 86 and paying your rent on time every month for the last 7 years.

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