How to right size a rent increase

Question

Have a single family renting for $1200/month. Tenant is burning a lot of money heating in the winter because of fuel oil furnace and I hate the idea of fuel oil in a rental. We both want it replaced. Geo-Thermal will cost approx $25,000. Need to increase the rent to cover that, but how do I size the increase correctly?

Dick Rosen · Answer

We do annual increases of 3-5% not to exceed market rate. Recovering a large upgrade is not a reason for a rent increase that's just the cost of owning a rental.

John Manner · Answer

John, I haven't looked recently, you are so right. That's still 30% federal. Thank you for the reminder!

John Underwood · Answer

Have you checked into Government tax credits and utility company rebates?

John Manner · Answer

Unfortunately not at that location. The other option would be to pay for a line to the nearest Natural Gas line, which was quoted at around $30,000.

Greg Scott · Answer

John:

Keep in mind your rent is effectively capped by competing properties.  Assuming your current tenant wants to stay, you might be able to split the savings with them to help cover the costs.  But, you may have a hard time renting to a new tenant if your rents are higher than nearby properties.

A $25K HVAC system is extremely expensive.  I have a hard time believing that can generate a positive ROI.   Are there not more cost-effective solutions in your area?