Strategies on increasing tenant rent

18 Replies

Iron Sharpens Iron. I want to hear your most effective ways at increasing rent from an already existing tenant.

I personally write up an email or letter 60-90 days out from renewal explain that their rent will be going up due to a number of reasons and that hopefully the service we provide is enough to convince them to stay (said in much more political terms then that).

What do you do for your tenants? How would you improve my method? Thanks guys!

I am interested in this discussion. I recently acquired a 2 unit property with tenants who have been in the respective apartments 20 and 30 years. They are only paying $355 a month, way below the market. Most are going for $650. Granted the place hasn't been updated in 20 years.

I plan on raising the rents to $500 each apartment so I can update the place and eventually get to $650 in a few years. They are on a month to month with the previous seller and so I have to give them 30 days notice to increase. What is the best way to do it? 

When we were looking at the property, the one tenant asked our realtor if we were going to kick them out and she said no but the rents will have to go up to fix and update things. The upper tenant started talking about being on a fixed income and retired. It's not section 8 but do I just wait til these people leave for a retirement home or say sorry, $500 is a cheap apartment and things need to be updated. The tenants made comments about how things were new in the 90s like implying they want things updated. 

@Chris Courteau  

They can't have it both ways.  Your tenant can't an updated apartment with low rent.  Personally I would increase rent to what you want to raise which sounds like $650 and if they choose to stay than they can stay.  They will likely decide to leave and when they do now you have an empty unit in which you can update.  You have a responsibility to yourself to profit off of this building.  If you've done your homework don't wait another minute and charge what you believe the market value is.  Take emotions out of everything.

One last note if you do push it to $500, and you plan on eventually increasing it to $500 isn't the same thing going to repeat itself with your next tenant?  

@Nick Ferrari

We purchased a 10 unit apartment complex recently and the rents are all below where they should be and none of them were at the same amount just whatever the former PM and owner felt like writing that month!🤷‍♀️

So we evicted 5 out of the 10 and we cleaned those up and raised the rent.

We have 5 more that we need to raise so over the course of the next few months we will be doing some upgrades then in January we will bring the rents where they need to be. We let everyone know this verbally that in January we will be brining the rents to fair market rent. That they would all receive written notice in December giving them 30days notice.

In our lease it states rental increases can happen with 30 days notice

I go and visit my tenants and we have coffee in a friendly meeting. I ask them what they like about the property. Sometimes, they get off point and try to tell me how they want me to fix or upgrade it. I explain, usually, why I can't. I leave after thirty minutes and as soon as the door closed behind me, I send them a text message from their front porch, really to thank them for the coffee but also mentioning that the rent is going up, starting from next month. I think this is a nice way to learn about a rental increase and nobody's ever complained.

Originally posted by @Beth Matherne :

@Nick Ferrari

We purchased a 10 unit apartment complex recently and the rents are all below where they should be and none of them were at the same amount just whatever the former PM and owner felt like writing that month!🤷♀️

So we evicted 5 out of the 10 and we cleaned those up and raised the rent.

We have 5 more that we need to raise so over the course of the next few months we will be doing some upgrades then in January we will bring the rents where they need to be. We let everyone know this verbally that in January we will be brining the rents to fair market rent. That they would all receive written notice in December giving them 30days notice.

In our lease it states rental increases can happen with 30 days notice

 Beth,

Evicting 5 of the 10?  Were they not paying, or do you mean non renew their lease instead of eviction?

We renewed their lease but over the course of 2 months we evicted 5. 1 for a lease violation,  3 for nonpayment, 1 for nonpayment and a lease violation.

Apparently the former owner and PM would allow them to make tiny payments through the entire month. 

@Nick Ferrari this is always a difficult conversation, and you have to think of it as a business. I recently acquired a 6 unit property in Cicero which is a C class suburb here in Chicago. The tenants were paying around $650-675 for 2 bedroom apartments. The market rent is around $1050 for these units in their current condition. I decided to offer all the tenants $900 per month if they stay, and I will do basic improvements. I can then bump the rent another $50 next year, and continue to raise the rents over the next few years until I get up to market. 

Of the six tenants, four immediately told me the rent was too much. I simply told them that the previous owner couldn't afford to improve the building and that the town requires me to update many expensive parts of the building (all true). 

At the end of the day, this is a business. You can be compassionate for sure, but the land lord/tenant relationship is ultimately meant to be temporary. If someone has been in a place for 20 years and you raise rents, they are free to look elsewhere for cheaper rent. 

Nick, here is what we send - let me know if you find improvements to this:

Subject: [Property] Rent Increase Notice
Importance: High

April 23, 2019
[Tenant and Tenant]
[Property Address]

RE: Notice of rent increase


Dear [Tenant and Tenant],

The time to discuss lease renewal for your rental is fast approaching and we wanted to let you know our plans and give you plenty of notice for you to plan accordingly.

I want to take a moment and let you know how much we value both of you as residents. It is not easy to find residents that pay their rent on time and also take care of the property. Unfortunately, due to consistently rising associated costs, it has become necessary to increase your rent.

This letter is to formally inform you that starting on [Date], the monthly rent for the house you currently occupy at the above address will be raised 2.7% (below the national average of 3% and well below the [City] MSA area of 7%)from $[rent] to $[new rent]. The payment is due on the first of each month. Your lease will officially be over on [Date]. We would like for you to continue as our residents, but an increase of $[$$] will be applied to the new lease term. Please note that we are informing you more than [NN] days in advance per the terms of your Lease.

We consider the current market rent for [Property] at $[N.NNN]. However, since you are already established in the property and if you decide to continue leasing with us we will not incur the make-ready expenses required to prepare the house for top market rent, we consider that warrants a monthly$[NN discount].

Your monthly rent is the only change in the original rental agreement – all other terms and conditions of your lease will still apply.

Please remember that if you choose to terminate your Lease, you must provide the required written notice according to the terms of your Lease. Failure to provide this required notice indicates your approval to continue the Lease with this rent increase.

This increase was not a stress-free conclusion and that our desire is for you to continue as residents. Again, I thank you for taking care of the property and being good residents that you are. I hope that you will continue to remain a resident at [Property]. If you have any questions or concerns, please feel free to call me at [phone].


Sincerely,
{PM}

I included some more information to detail this matter:

Q: What is the justification for this increase?

A: Here is some of the backup justification that went into consideration of this decision:

-Property taxes and insurance rates increase every year necessitating an increase in rental amounts in order to continue to maintain your home. I am forced to raise the rent because the local property taxes in this area have been increased by 8.5%, from $5271 in 2017 to $5715 in 2018 to $5,979.

-Inflation affects us all, and that means the variable costs such as maintenance, building materials, and labor go up which needs to be covered by rent increases. Unfortunately, we have experienced some substantial expenses with this rental property in 2018.

-Comparative Rental Market Analysis – we used two realtors and multiple online tools to assess the rental CMA - the neighborhood shows a $0.75 per sqft corresponding to a rent range of $[N.NNN].

-Alignment in Rental Market value:

  • According to the Zillow Rent Forecast, Austin, annual median % change for 2019: 4.1%.
  • The average rent for all apartments in the Austin area hit a 7.5 percent increase from the year before.
  • The Austin American-Statesman reports that the trend of rising rents is only expected to continue in 2019.
  • Capitol Market Research, which tracks Austin-area rents, estimates a 5 to 6 percent increase in 2016.By the end of 2016, rents are projected to jump up to $1,741 in Austin
  • Rent has climbed 7% in Austin. In all these cities, rent is growing more than twice as fast as the national average of 3.3%.

Q: How much might cost a decision to move?

A: If the move is in an effort to avoid a rental increase, here are some numbers to take in consideration. For example: [a three percent (or $30 per month for $1000 per month property) means to pay an additional $360 per year]. The time and cost to move may be far higher.

How much time is this going to take? How much traveling will you need to do? How many hours of work will you need to take off? And then how much will the new property cost on admin expenses?

Application fees, First month’s Rent and Security deposit. To begin with, no matter where you go, chances are you’ll be required to pay not only first month’s rent, but a security deposit as well, cleaning deposit/fee, in addition to non-refundable applications fees.

Utility Deposits. You may be required to pay new utility deposits. Have you checked what those costs will be?

New items. For any new property, there are always needed purchases such as window coverings, shower curtains, even furnishings.

Moving Truck. A typical U-Haul (our local rate) is $19.95 per day for a small truck. There is an additional charge for mileage, blankets, boxes, insurance, and tax (usually adding up to a total of $50+).

Time and Effort. Few people ever calculate how long it will take to pack and unpack everything they own, in addition to the carrying, loading, and unloading time and effort. Even if friends and family pitch in, what is everyone’s time worth? Not to mention the effort involved in gathering enough boxes and packing materials for everything you own.

Children. Will you be able to keep the children in the same school district or near their friends? Moving is a very stressful time for everyone involved, including pets.

And keep in mind, it will happen no matter where you go - no matter where you move, your new landlord’s costs will also continue to increase and so will your rent. Remember: Moving is stressful, costly, and a complete pain.

Q: Will there be a new lease extension to sign?

A: Yes, a new Extension of Residential Lease agreement will need to be signed. See attached.

Q: Will there be an increase in security deposit?

A: Rent increases often trigger security deposit increases. This means that if the rent goes up legally, the security deposit may also be legally increased. However, we will NOT demand an increase in security deposit with this lease renewal.

Q: Will you accept an extended lease?

A: If you want to lock in rent for a longer period, we can discuss options. 

@Nick Ferrari one of the best ways to avoid the uncomfortable conversation of a rent increase is to just be up front about it in the beginning. Although, some may like the stability that comes from keeping rents depressed, the reality is that if you're an active investor it may actually come back to hurt you if you don't keep rents up with the market, think of refinancing, re-positioning, selling and things like that. Yes, sending out a notice of rent increase 60-90 days out is a great idea but, it shouldn't be the first time the tenants are hearing of it and may actually rock the boat with a current good tenant. Why not build the rent increase right into the Lease from the beginning? You can do a percentage like @John Underwood mentions or just spell it out in a dollar amount or both - 'On June 2019, base rent will increase by 3% -($100/mo.) and the total amount due thereafter, including the month of June will be $X,XXX.'

On another note there are other ways to increase your property income without increasing rent however, you will most likely have to do it on lease renewal or with a new tenant. You could possibly keep your rent the same (especially if it is already high compared to the local market) but, instead charge for additional amenities such as storage, parking, utilities, etc. Doing it this way will allow your listing to appear better priced compared to other listings but will give you and the tenant the option to purchase those additionally charged amenities. So for example, instead of increasing your rent from $600 to $625 and possibly turning off price sensitive tenants why not list at $595 and instead charge $25-$30/mo. for storage, etc.? In addition to that, you will also build in your rent increase into your lease like talked about above. 

Lastly, on the rent increases... you need to find the 'sweet spot' where you are able to apply your rent increase but the tenant is not motivated enough by it to move out because doing so would cost them more $. It's worth noting that one of the most successful methods of increasing rent is by providing options which also further streamlines your operation aside from just a simple rent increase. For example, you can decide to increase the rent by $50/mo. but will increase only by $25/mo. for the months the tenant pays rent prior to the 1st of the month, etc. (this can be anything i.e. payments made online, decreased utilities usage, etc.) --- In this strategy you are able to achieve multiple goals -- the tenant feels like they have options, are in control and could save some $ by fulfilling the requirements - and you get your rent increase and achieve a pressing goal to further streamline your operation. I hope this helps.

@Nick Ferrari I personally think your method is fair. Well enough time to set expectations for them and also to start discussions if they can afford the rent bumps.

I think that is great, especially with a polite message. It gets iffy when you are letting them know 30 days out.

Originally posted by @Chris Courteau :

I am interested in this discussion. I recently acquired a 2 unit property with tenants who have been in the respective apartments 20 and 30 years. They are only paying $355 a month, way below the market. Most are going for $650. Granted the place hasn't been updated in 20 years.

I plan on raising the rents to $500 each apartment so I can update the place and eventually get to $650 in a few years. They are on a month to month with the previous seller and so I have to give them 30 days notice to increase. What is the best way to do it? 

When we were looking at the property, the one tenant asked our realtor if we were going to kick them out and she said no but the rents will have to go up to fix and update things. The upper tenant started talking about being on a fixed income and retired. It's not section 8 but do I just wait til these people leave for a retirement home or say sorry, $500 is a cheap apartment and things need to be updated. The tenants made comments about how things were new in the 90s like implying they want things updated. 

 You're running a business, just follow the law and try not to let your emotions effect your decisions too much. Those tenants don't care about you anymore than you care about them. They had 20-30 years to plan their retirement and have some self reflection on their situation. 

@Nick Ferrari What's your reason for increasing the rent? I think a rising percentage below 5% is reasonable and acceptable. Are you considering raising rent because of your expense or because you want to raise your profit? But I think raising rent within a range every year is feasible. Just remember to talk to your tenant in advance. 

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