Accountant · Raleigh, NC · Member since 2016 · 6 posts · 2 votes
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!
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.
Curious how hobby landlords seem they can either keep a "good tenant " or collect market rent. Professional landlords expect both although there definition of a "good tenant" is likely different.
@Nathan Langdon she has lived there 10 years, so I am guessing the place hasn't been remodeled in at least 10 years. You might want to think this through as opposed to being greedy. Is a place outdated at least 10 years really worth $900/month? Or are the places renting for $900/month similar homes with recent updates?
Never underestimate the value of a good tenant, especially if this will also be your neighbor.
I can see both sides of the argument . You got to get fair market rent or close to it but you also don’t want to potentially lose thousands in turnover which any investor can tell you will kill a year of cash flow quick . In this case That isn’t an emotional decision in my view . Part of being a good business owner is mitigation of costs and turnover is a real dollars and cents business loss you must weigh .
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!
I would consider a gradual increase. You could tell the tenant that market rents are currently $900 for comparable units. Tell the tenant that you are willing to work with them being a long term renter and increase rent to $850 for first 6 months of lease and then to $900 for month 7 and going forward. It will come across that you are reasonable and make her feel like she's receiving a discount for those first 6 months while only hitting your wallet for $300.
@Nathan Langdon good tenants are worth their weight in Gold I have raised my one tenants rent 95$ a month over the last 18 months and his unit is 200$ under market. I have found it to be worth it to keep him happy and when he moves Im sure I’ll look back and say I could have went to market rent sooner, but I am an out of state landlord so it’s not worth the risk.
$125 more is too much. Pick a value she will not hesitate. To notify her like 2 months in advance so she feel comfortable with the increase. I think you may want to sign another lease annual with you as the landlord. Check your deposit it should be increased also.
@Nathan Langdon As you don’t want her to go, she does not want to leave. 10 years in a house, this is for her, her house.
If the prices all around are higher than what she pays, and you explain it and prove it to her, she has two choices: pay more because anyway she would pay a higher price than today for another place to stay , don’t pay more for your place but take all the hassle to move, change place for her and the daughter etc.etc.
I bet she will choose to stay where she is. I would increase it to 850. She earns 50$ , you make more money on the rental and keep a good tenant. It’s a win win situation.
Raise the rent moderately as others have said. Vacancy costs are often underestimated. I faced something similar in May.
Ultimately, the tenant will ask themselves, “what’s in it for me?” as in any negotiation. Just be prepared to answer than question (or do it proactively) and you’ll figure out the right answer.
In my case, I raised the rent and we agreed to a multi-year to make them feel comfortable that I wouldn’t hike it up again next year.
As you are house hacking and the place hasn't been updated, raise the rent moderately and lock in a lease. Fix up your side and give her a first shot at moving into your side at market rent after the lease and switch to the live and fix the other side of the duplex.
Something I haven't seen anyone mention, since you are House Hacking, is she a good neighbor also? Even with good screening you never know who you may get. Devil you know vs. the devil you don't.
Congrats on the first investment property. Good Luck and keep us updated.
Wait. Why are you negotiating? You own the place. You set the rent. You set the deposit amount. You set the parameters for applications. You write the lease. Where and why is there negotiating?
Great tenants that will stay forever are invaluable. I'd let her know that the market rent for her unit is $900 and let her know you def want to keep her so you're only raising it to the $825-$850 range. There's a high probability that she'll be fine with that and be happy you're doing her a favor. This way you're not losing as much rent and you keep an A+ renter.
Wait. Why are you negotiating? You own the place. You set the rent. You set the deposit amount. You set the parameters for applications. You write the lease. Where and why is there negotiating?
If you want to keep the tenant, then why would you not be open to hearing and addressing their concerns? If you want to steam roll them, then that's a different story, but the OP was asking about not pushing the tenant out.
@Latimer Luis Actually, the OP was asking what he should do about rent that is $125 below market value. If you call setting rents at market value as "steam rolling" tenants, then you clearly are not investing in real estate for profit. You are doing charity work. $125 month, $1,500 a year, $15,000 in 10 years. And that's just at today's market value. Addressing a tenants concerns is absolutely necessary. Negotiating rent is not addressing a concern.
There are a lot of good advice on here. Any updates on what you ended up doing and the result?
In general, I think anyone should do what makes the most business sense to them. I would provide ample notice with a brief explanation of the market rate of comparable properties, raise the rent moderately, and throw in fresh paint or new fixtures because a person is such a good tenant. Like someone else mentioned, if rents nearby are not much different there should be no issue raising your own property to match. They don't have much choice other than moving in a sub-par property.
@Latimer Luis Actually, the OP was asking what he should do about rent that is $125 below market value. If you call setting rents at market value as "steam rolling" tenants, then you clearly are not investing in real estate for profit. You are doing charity work. $125 month, $1,500 a year, $15,000 in 10 years. And that's just at today's market value. Addressing a tenants concerns is absolutely necessary. Negotiating rent is not addressing a concern.
I think if you're raising rent to market value that's much greater than what they're currently paying, then hell yes I think that's steam rolling. It's not an emotional decision either, it's about the value of having a long-tenant who takes care of your property when you're not around. The cost of vacancy, the effort in trying to find a new tenant, and the risk of getting a bad tenant just don't make it worth it. But maybe that's just me.
If you have a GREAT TENANT, why would you risk putting someone new in there simply to get to market rent? To me, that's a long-term mistake. I run a renewal business as my full-time job so while I may not have 100 properties, my "real" job revolves around customer retention. There's a lot of similarities with trying to get one of my customers to renew at list price and having a tenant get to market rate. The only way to get to list price is to show value, and the way to show value as a landlord is to be respectful and attentive. Just my 2 cents.
If you don't want to listen to your tenants' concerns, then hire a property manager. Full stop.
You just said raising rents to market value is steam rolling a tenant. We will just have to disagree on this one. Maybe in your area it is hard to find good tenants and you simply need to keep any good tenant you can get, at any cost. I don’t know.
@Anthony Wick you initially asked me about why I would be negotiating with the tenant. I never said that raising rent wasn’t an option or the right choice. You’re right, every market is different so maybe it is hard to find a good tenant in some areas.
I have a long term tenant that's about $220 under market. However, she can't afford more and I'm not in a position to turn the unit (it'll need major rehab) So we just roll along as is. It cash flows ok because we bought the house in 2011 at the bottom of the market. I expect her to move at the end of her two year lease but won't push her.
In the OP's case, I'd talk to the tenant, explain to them that the market rent is currently xx amount and you need to raise it some but will only raise it to x because you would like them to stay. As others stated, the unit may be in need of refurb so the price she's paying may be closer to market than you think. Once the owner's side is refurbed, you would be in a better position to push to market price.
Short sighted thinking. Not every move is meant to be for today. If you’re in this business for profit then you need to think about long term.
I’m closing on another duplex next week. I asked for one unit to be delivered empty (he was behind on rent). The other unit decided to not go MTM after their lease was up July 31. They did this because they know they are paying $200 under market rent. I could have asked the seller to renew them at that rent. Basically like people are telling the OP to do. No difference really.
Instead, I will close with both units empty. And a lot of interest at much higher rents. I probably won’t get any rent for August (unless people want to move in ASAP of course). But come September, both units will be rented at full market rents and within 6-8 months the no rents in August will be in the past.
You can always do whatever you want with your own properties. My stance is to think long term and to set rent at whatever the market rate is.
For the people saying "raise it to market right now" or you are subsidizing the tenant and making this an emotional decision, and not a financial decision...... I don't agree.
Then unit is 10 years old....at turnover you expect a good 3-5k turnover cost....
So raise the rent $125/month.... you MAY make $1500 more per YEAR.....but you spent 4k to do that..... so it take YEARS to break even......AND you go through the risk of a different tenant not being as good as the last one......
I don't see that choice as being the sound financial one.
Yes you want to maximize your investment, but spending 4k to make $1500 doesn't make any sense.
The happy medium is to raise it some, but not enough to make it worth the tenant to move out.