New owner seeks advice on how to raise the rent

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New owner seeks advice on how to raise the rent

Account Closed
Member since 2019 · 17 posts · 4 votes

We are out of state investors that just bought a triplex in Mesa, AZ. All three units are rented out to reliable long term renters (minimum 2 years) but are about $150 under rental market value. All the units are clean and do not need renovation (done in 2014). I am seeking advice on strategies to raise the rent but keep the current tenants. Thanks for your help!

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Brad E.
Investor · Athens, GA · Member since 2015 · 205 posts · 66 votes
7y

@Kory Knapp

Don’t forget your tenant will have to find equivalent housing if they don’t stay put. If you are indeed below market rent then they will not find anything better. Plus they incur the cost of moving.

I inherited a tenant of 8 yrs in a unit. I’ve had the property 2 years and raised rent both years no issues.

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    7y

    Are you on a lease or MTM?

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  • Account Closed
    Rental Property Investor · Abilene, TX · Member since 2016 · 61 posts · 8 votes
    7y

    @Kory Knapp

    This is where you have to determine if the rent increase is worth the risk of losing the current tenants. If it is then in thing you can do is talk to them and let them know that you will be raising the rent 10% to 20% per year until the rent is at market value. If you like the tenants and don't want to run the risk of losing them then I would not raise the rents. One thing to keep in mind is that nothing will be changing for the tenants except less money for them to stay in the same place they have been living in for the past few years.

    Let me know what you decide to do. Thanks and good luck.

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  • Doug McVinuaPro Member
    Property Manager · Queen Creek, AZ · Member since 2016 · 608 posts · 426 votes
    7y

    @Account Closed It's a careful dance to walk as the value of a good quality long term tenant is significant.

    1. I always show them we care about them and demonstrate that with walkthroughs and a willingness to address any issues the unit might have. It's often little things that we can repair/fix that makes them feel welcome and appreciated.
    2. Often paperwork, leases etc are out of date and should be updated for legal purposes and it's also an opportunity to increase the rent slightly.
    3. Demand in Mesa is high so replacing a tenant is not challenging, turnover costs money so we try to avoid it but in the end sometimes reminding tenants that demand is strong wakes them up.

    We have been successful at raising rents across the board in Mesa.

    [email protected]602-751-7577
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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    @John Thedford All tenants are currently on a month to month lease. I will have to renew these once escrow closes. I plan to keep them on a month to month to feel them out.

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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    @Jace Thornton It is tough to say if they are worth losing. The previous owner raved about them. One of the tenants even does the landscaping for free. So I think at this point they are not worth losing.

    I am thinking about waiting a few months and then staggering a 10% increase. With the landscaper getting the last increase. So in 6 months they will all be paying 10% more.

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  • Account Closed
    Rental Property Investor · Abilene, TX · Member since 2016 · 61 posts · 8 votes
    7y

    @Kory Knapp

    My only concern about that strategy is that if they talk, and I suspect they will talk, is they will not be experiencing the increase at the same time. If it were me, I would raise the 2 tenants not bringing additional value 10% at the same time. On the next rent increase I would raise them all 10% which would still afford the landscaping tenant the 10% difference in rent.

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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    @Doug McVinua We will be hiring a property management company. We are currently vetting some out. We want to make sure that they are very responsive to the needs of the tenants. We want to show early on that we are Owners that care about our tenants and in return they care for our property.

    We are also thinking about installing a coin op laundry in a common room for use by the tenants. Do you think that would be considered a step in the right direction by the tenants.

    We are also thinking about writing a letter introducing ourselves and discussing the new changes, possible rent increases and seeking their input. We would mail that out and then Have the new PM visit them and discuss the topics in the letter. Thoughts?

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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    @Jace Thornton Thanks for the advice! I like that approach.

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  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    It depends on what the current rents are $500 or $1500.  Check local laws for notice of rent increase and if there is a cap on the amount.  Then increase the rents by $75 a month and again next year.

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  • Doug McVinuaPro Member
    Property Manager · Queen Creek, AZ · Member since 2016 · 608 posts · 426 votes
    7y

    @Account Closed Hiring a good Property Manager is a smart move! 

    Coin-ops are typically done two ways, 1 is to purchase the equipment and the other is to do a lease revenue share model. Income off 3 tenants is going to be limited so I would be cautious and even potentially poll the tenants on a few items to understand what's important to them. It's a good idea and might be something that works great.

    As new owners, I would advise you to either find and hire a Property Manager or self manage. The middle ground I'm reading is muddy and often allows tenants to work both sides. Hire a Property Manager you trust and like and let the Property Manager interact with the tenants. Maybe a short simple letter welcoming the tenants as the new owner as you introduce the new Property Manager without any of your contact information. In the end you either want a Property Manager or you don't? I work with owners all the time regarding properties and tenants but some of the most frustrating are a few where the tenants have the owners contact info and run to them every time I provide an answer they don't like. I liken it to children not getting the answer they desire from dad so they go to mom and beg to hope for a different answer. Owners will occasionally call me with sympathy towards an issue until they hear the whole story only to find out the tenant left out a few important details. I like a majority of our tenants but you also learn no is sometimes the correct answer, that's why it's called management. 

    [email protected]602-751-7577
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  • Pamela Sandberg
    Realtor / Attorney · Phoenix, AZ · Member since 2018 · 388 posts · 265 votes
    7y

    @Kory Knapp: start the discussions now so the tenants don’t feel blindsided. Tenants expect some change with new ownership. If you wait and increase the rents in 6 months or a year without warning, that will probably be a much more difficult situation than giving them a heads up now.

    As has been said, there’s a healthy rental market in Mesa, so don’t be afraid to lose tenants who refuse to pay market value. I think under valuing your investment would be the bigger loss.

    1Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y

    @Account Closed I raise heavily at turnover time and more gently on existing tenants I wish to keep. I would do 2 5% raises rather than one 10%. At turnover time I do whatever is needed to have a highly desirable unit to market, and make sure the rent is inline with comparable buildings in the neighborhood.

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  • John Teachout
    Rental Property Investor · Concord, GA · Member since 2015 · 3k+ posts · 3k+ votes
    7y

    Try to avoid large rent increases. An advanced notice is good for two reasons, one is it gives them time to "get ready" for the increase and the other is that it gives them a bit of time to shop around and confirm they're still going to be paying less than market. In this situation I would probably discuss what the market rent is, what the increase will be and when. Then I would put out a timetable for another increase down the road. ie, your rent will be increasing $25 on such and such date and then will increase $25 on such and such a date. This would also be a good time to find out any issues with the property. ie, is everything working properly?

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  • Brad E.
    Investor · Athens, GA · Member since 2015 · 205 posts · 66 votes
    7y

    @Kory Knapp

    Don’t forget your tenant will have to find equivalent housing if they don’t stay put. If you are indeed below market rent then they will not find anything better. Plus they incur the cost of moving.

    I inherited a tenant of 8 yrs in a unit. I’ve had the property 2 years and raised rent both years no issues.

    1Reply
  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    Thank you for all the great advice. It will help me make a much better choice!

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  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    7y

    @Account Closed

    If your rent is currently $800 and should be $950, you are losing $5,400 a year. That's probably not a good business model. I recommend getting them to within 10% of market rate and I recommend doing it immediately. If they are smart, they will recognize the value of staying 10% below market and not having to move.

    I do not recommend writing them a letter introducing yourself unless you're going to be managing it. First, they don't care about you and your kids and that you're bettering yourself through real estate investing. All they want to know is that the property will be maintained and that they won't be cheated by a slum lord. If you're hiring a manager right away, let the manager handle everything. If tenants get your contact information, they will eventually start calling you instead of the PM and may even try to play you against each other in difficult times.

    The DIY Landlord Book4.7248 Reviews
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  • Daniel Blackford
    Specialist · New Smyrna Beach, FL · Member since 2016 · 20 posts · 14 votes
    7y

    @Kory Knapp I wouldn’t try to get to market rate all in one annual rental increase. Use local comps and maybe Rentometer to see where rents need to be to be market. Gives you good info for your arguments. The tenants know they have been getting a deal. $50 monthly is probably a limit of tolerance for a tenant. I’ve heart it is more like $25but..... their affordability is not your issue. Be fair but firm. And use a property manager to be the bad guy.

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  • Account Closed
    Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    @Kory Knapp

    If the tenant was to move out now, how much do you estimate it would cost to get the place cleaned up and rented again?

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  • Alan Grobmeier
    Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
    7y

    @Account Closed, A 10% increase basically equals a Gtfo notice.  Tread softly or you could have 100% vacancies.

    It’s EASY to evict in AZ.  As a result, I’d offer them 1 year lease at 7% increase.  See if anyone leaves.  Then do it again next year and observe the ‘fallout’ until you are at market OR need to dial it back.

    Best of luck.

    0Reply
  • Christopher Reeder
    Rental Property Investor · Auburndale, FL · Member since 2018 · 58 posts · 68 votes
    7y

    @Kory Knapp

    I closed on a multifamily this month and provided 75-day notice of the new rates for all MTM tenants. I chose to move rates one time to within $25 of the market. Of the 8 MTM tenants, 3 have explained they are moving before the rate increases.

    My Central FL market has a high rental demand. 2 units vacant at closing have been leased under my terms at my asking rates. This further supports my decision to move rates immediately, allow the tenants to make the full decision and move on with my reposition strategy.

    Each landlord has a decision to make in this scenario. Remove emotion and think financially on how you planned to execute your financial strategy. The early you reposition, the earlier the property performs to your proforma expectations.

    Chris

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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    FYI. The current rents are 1/1 = $500 and 2/1 = $675. Rent-o-meter cites an avg of $800 for 1/1 and $830 for 2/1. Local PM thinks $150 increase is market value.

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  • Account Closed
    OP
    Member since 2019 · 17 posts · 4 votes
    7y

    To all,

    Thanks for all the great advice. I’ve taken bits and pieces and formulated a plan. We’ve hired a PM that has many similar properties in the area. We are going to send an introduction letter with a brief intro of the new owners and an announcement of the new property managers. The letter will also announce a schedule of rental increases. In August we are going to do a 10% increase to all units with the exception of tenant that takes care of the landscaping in exchange for his continued services.

    In January we are going to do another 10% increase across the board. Finally in June 2020 we are going to start a utility sharing program in which we will all split the water/trash/sewer bill. These increases will get the units near market value.

    Our hope is to retain the current tenants but make the property a positive cash flow business.

    Thanks again for the input! Keep you guys posted.

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