Raise Rent to Market or keep good Tenant?

51 Replies

I just closed on a duplex in April using FHA financing to do a house hack. The market rent for each of the units (both 3 bedroom + 2 full bath) is approximately $900 each. I have inherited the tenant living on the other side, and on a month to month lease. She is a great tenant with only one college aged daughter and no pets. This tenant has been in the unit for 10 years and never had any problems. She also keeps the unit very clean, so I really want to keep her.

However, her rent is much lower than the market rate. She started out at $725, and only two years ago got raised to $775. So I’m looking at hitting her with a $125 increase if I want to get the market rate for the unit.

My question is this: should I raise her to $900 and risk loosing a long term steady tenant or should I discount it by only raising to $850 and more likely keep her.

I’m brand new at this so any advice is welcome. I will be putting together a new 12 month lease for her to sign this month, so any thoughts about that are also welcome. Thanks in advance!

It depends, is the increase in CoC and Cashflow significant enough to risk losing her. If you do lose her, what does the rental market look like, what kind of time horizon are you looking at to re-lease. A higher cashflow is always better on paper but if its a slow market right now and the only tenant you can find is someone who trashes the place you'll be spending that extra money on repairs once they move out. Just food for thought.

@Nathan Langdon   Thanks for the post with really a great question that I think many investors have had or will face in the future.  I think you will get a variety of answers here and in the end it's going to depend on a combination of your business model and your personal values.  

Since we are talking about a duplex and one tenant, I think communication is the key here.  I would personally setup a meeting and have documentation ready to show her what fair market rental rates are for that property.  She may have no idea so I think I would first want to educate her on that so you are both coming from the same frame of reference. 

I would then simply have a conversation with her on how close she can come to that fair market rent value.  Letting her know that you are willing to work with her on a fair price based on her tenure and your needs as the investor who has a mortgage to pay.  

I guess my point, she sounds like a great tenant whom you are going to be living next to.  So if you want to keep her than she has leverage from that end, and you have leverage from fair market rates and the goal (at least for me) would be to try and meet in the middle for this next year and then level set maybe the next year (or even make it a 6 month lease instead of 1 year). 

Best of luck! 

If she moves out and you are hit with a vacancy, how much will that cost?  Raise the rent, but not by $125.  Talk to her and explain what you planned to rent the place for and that she's been a long term tenant, so you won't raise it the full amount. 

@Nathan Langdon

Raise the rent moderately.  If you raise the rent to $825 that's approximately a 6% increase.  She has been there for 10 years the cost of the vacant unit will probably be at least $4,000.  New paint, flooring, carpeting, etc.  If you raise the rent to $900 she moves out, the unit takes 30 days to rehab and fill.  That cost is $4900.  One month vacancy plus rehab.  The increase of $50 increases your annual revenue by $600 annually.  Raise rent moderately.

Good Luck.  

Thanks all for the replies. Some additional background info.

This duplex is one of 15 in a neighborhood, and 5 of them are 3 bed, 2 bath each side while 10 of them are 2 bed, 1.5 bath each side. They were all built together in 1999-2000 by one owner who has just now sold them all. So until just now, most of them have been under market rents, but with all duplexes being bought by new investors, I expect the other units to come up to market rates fairly quickly.

Just today, I got an alert from Zillow that one of the 2 bed, 1.5 bath units was just listed for $850 monthly rent. So ultimately, I do want to keep this tenant, but there is a good case for a raise, and I think I could fill the unit fairly quickly.

Another option on the table that will cut down the turnover cost of rehabbing is that my wife and I could move into the vacated unit and rent ours out, which by the end of the month we will have finished repainting ourselves, as well as getting vinyl plank flooring professionally installed. With a few other small kitchen upgrades like doing a backsplash, replacing an old range, and upgrading countertops, we think we could potentially get $950-$1000 for our unit (which will be the plan anyway in a year or so when we move out).

Did you save up money and invest in this property to build wealth for yourself and your wife or did you buy it to take care of the tenant and make her life easy? That's your answer.

You don't have to be mean about it but you also don't have to give her a 30-minute presentation with a comparative market analysis. Tell her you've studied the market and the unit should rent for $900 a month. Give her 30 - 60 days notice of your intent to bring the property to market rate. You may consider keeping it a little lower to entice her to stay but I wouldn't recommend more than $50 which is a $600 annual loss for you. Or you can bump her to market rate but give her some kind of "reward" like painting some accent walls or maybe updating her old fridge.

It's a business. Treat people honestly and fairly but don't forget to do the same for yourself as the owner.

@Nathan Langdon

She is $125 below market rate. Invested conservatively at a 7% gain, that $125 per month is costing you about $21,000 over the next 10 years.

There are lots of good tenants out there. Give the appropriate notice and charge market rent. If you need to do deferred maintenance then you’ll probably be able to charge even more if she moves out.

@Nathan G. Thanks for your thoughts. I really like the idea of giving her unit an upgrade to show the increased rent benefiting her. That’s also a great point to remember that I need to look after my own interest in this rent negotiation as well. It’s not just about the tenant needs.

@Anthony Wick Yes that’s a great point. I’m leaning towards upping the rent to $900, however I’m still willing to go down to $850/$875 just for the first year to avoid the turnover. Even if I do get a good tenant in pretty quick, I’ll still probably lose at least one months rent in the turnover, so as long as I can get the rent up to $900 next year, I think I’ll come out ahead.

Raising the rent directly to full market does two things, first it will tell you if you have a tenant that can afford your apartment. If she can not afford full market rent she is not a good tennat and you need to replace her immediately. Second if she can afford full market you have maximised your returns as opposed to subsidising your tenants rent.
If you do not put it directly to full market, and she can not afford full market, what you have accomplished is to lose money and end up with the same vacancy in the future that you are trying to avoid. That is a very poor financial decision.
Immediately raising inherited tenants to full market is the wise business decision. Anything else is a personal decision. There is no reason a investor should be making personal decisions when money is involved.

@Nathan Langdon

I recently purchased several duplexes with inherited tenants. I did my research on fair market rents and had a sit down with tenants. I created a written rent progression statement that takes the rent to fair market but does so over time. This way, my tenants can remain in their home and adjust to price increases over a bit more time and I don't deal with turnover and renovation costs.

Living in one half and renovating it, then renting it out while moving to the second (currently occupied) unit is a good option.  You will be getting rent from the other unit while you fix the one up that you are living in.  You can always give the current tenant the first right of refusal to rent the renovated unit at market value.

Based on what you're saying here I would do a gradual increase unless this tenant never bothers me with anything and seems to take great care of the place as I look around while changing furnace filters or something in which case I might actually not increase it.

If the market was "hot" though, I might bring the rent up quickly.

If I was in any doubt though, I'd rather have the good tenant who pays on time at a below market rate than roll the dice on a new tenant after paying to prep for the new tenant.

@Nathan Langdon Is her apartment in the type of condition that apartments that rent for full market rate are? If so, raise it. If not, and she accepts the rent increase expect some repair requests and upgrade requests to come your way. 

Personally, if she is a good tenant and you would like to keep her I would raise to $850 now and tell her it will be raised to market rent after this year lease term.

@Nathan Langdon

First, congrats on your first investment property! I just recently closed on my first house hack as well and had he EXACT same situation occurred where I inherited tenants and the rents were below market value.

I personally decided on raising the rent but not at full value. I concluded that there’s more value in peace of mind and consistent income than the money upfront! I’m confident overtime I’ll get that money back and then some! I believe in a “double bottom line” in business: it’s about profit AND people. So, do right by your business and also do right by your tenant.

The fact that you are switching from month to month to a year lease is actually a great way to position it to your tenant. As I said to my tenant, “Though I am raising the rent, this rate is locked in, won’t go up for the next two years and ensures you this apartment over the term of the lease” (I extended it from a year lease to a two year lease). He was completely on board and appreciated the security of predictability more than anything else!

@Nathan Langdon

Hey. I’m back after reading all the posts. Let me say, you can absolutely charge below market rent if you want, but people need to stop saying it’s a sound business decision. It’s an emotional decision made out of fear that your tenant will move. You can still make money in your business at below market rents, but that doesn’t optimize your business.

If you bought your property to optimize your business and profits, you’ll always want full market rents. Keeping rents low and telling yourself you’re being a great landlord or human being is fooling yourself. My properties are at market rate, and I am a responsive and fantastic landlord. Some here think all those things cannot exist. They would be wrong.

All that aside, it is your property and you really should do what you want. We are not your business partners. I’m happy for you and your new property. Enjoy it.

@Nathan G.

I agree with Nathan 100% but in this case I would take market into consideration. If all the surrounding units just sold as well then I would maybe not apply this to it. Im not sure how big your market is but if its small town ish then I would wait . Maybe 850 now then next year once all your neighboring duplexes are filled hit her with another increase to market.

Id hate to be competing with remodeled vacant units forcing me to overimprove to compete.

@Nathan Langdon you have to protect yourself while also mitigating your risk. I had someone 4 years at $825 and eventually had to raise her to $900. I knew she would baulk and threaten to move. Well, she shopped around and then signed my one year lease renewal.

So, what will your market bear, and let her know without any fear. If you are a landlord, then expenses will go up, just a fact of life. Negotiate a win win !!!

@Nathan Langdon

I’m a big fan of keeping good tenants locked in.

I would move her to a 12 month lease that expires at a time that has the biggest pool of renters. Here in Rochester NY we have our leases expiring April/May. Which is when I feel most people are looking.

If you’re only going to be raising the rent by $50, but it causes her to leave, I’m not sure it’s worth it. You’ll have a month of vacancy ($900) plus you may have to flip the unit.

It’s up to you. But being that this is your first rental, I’d keep the easy tenants until you get comfortable.

My opinion.

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