Raising rent fair or unfair to this ideal tenant?!

16 Replies

I am getting ready to purchase this duplex for the intention of hacking to get out of debt from my early 20’s. The current tenant in there has been in there for 15 years! She’s sweet, kind, doesn’t complain much and really takes care of the place cleanliness wise. Unfortunately, she said she was moving out to a 1 story since she’s starting to have trouble with stairs. The previous landlords have kept her at market rent from when she moved in ($695) which is another reason I was fine with closing on this place because I could bump the rent up to market value ($950-$995) in my area. Now that closing is right around the corner, she’s changed her mind again and decided she wants to stay now. Now I’m faced with a dilemma. Slowly increase her rent over the years which defeats our purpose of house hacking or bump it up to market value and put the ball in her court to see if she still wants to stay? I’m leaning towards meeting in the middle and doing $850 to see if she takes it or leaves it which would still allow me to pay slightly below the rent value of what she’s paying to pay off my CC debt faster and still save for Cap Ex, maintenance costs and all that set aside but I won’t cash flow at all till I move out and have both sides rented.

What is everyone’s thoughts or advice?

It's really not about what's "fair", it's about what is a good business decision. In this case, since you relied on her stated plan to move, when making your offer, I wouldn't feel bad to tell her okay but you have to raise the rent. HOWEVER, since you are house hacking, it may be advantageous for you to complete your side and rent it before you lose her as a tenant, especially if both sides needs reno before you can achieve market rents. It may be that she hadn't really looked at properties and didn't realize what market rent was when she told you she planned to move. So it might be a win-win if she stays for a bit while she locates an all one level place and you have time to reno the other side

I hail from the MF space so I think along those lines.

This is a classic mom and pop operation where they are afraid to raise rents or become to friendly with their client and now fall way behind. I would push the rent, explaining to her that this is your business. With that being said I would give her a bit of notice meaning from day one be transparent and let her know what is going to happen. I would step her up, so for example 100 the first 6 months then 100 more the next 6 months leave it there for a year and go up to market so the first year you have two bumps and then the start of the 3rd year you go to market. This way the property will stabilize. I would also offer her something for her apartment. New appliances, New paint, New lighting / plumbing fixtures, a dedicated parking space, new carpet or carpet cleaning, ceiling fans, etc. I wouldn't offer all of those but I would look to add value to her living conditions as I bump the rents. Generally speaking I like to get back my money with in 3 years depending on the rent bump and improvements I do. So in the first year you receive 1800 in increased rents, the second year you have 2400 so by the end of year two you received an extra 4200 in rents. You can probably do a stainless steel appliance package for 3000. This way when her friends come over it's not Kyle raised my rents he is a slum lord it's oh the new Landlord, That's Kyle he's so sweet look at this fridge and how about this matching stove he installed, not like the old landlord, he wouldn't do anything for me. Always look to add more value to your client than you take in payment. You may ask her what she would like I can paint your unit or install new fixtures through out which would you like. She may hate the color and be glad to get new paint. You just never know. Always look to add value to her.

Were you planning on living in her unit or the other one?  If it was her place, move into the other unit, fix it up and while you are doing that, let her know the rent will be increased.  Explain that market value is $950-1000 and show her the comps.  Tell her you know she's been there a while, so you don't want to increase the rent to market value all at once and go from there.

@Kyle Falkenstein i hope i don’t come off as too blunt or cold hearted but I’m gonna put it to you straight. If you plan to ever get anywhere in this business, you gotta treat it as a business and run it as a business. Unless you got into this for charity work, raise the rents and to market and move on.

@Kyle Falkenstein When I first started out as a landlord I was afraid to raise rents. I thought I was making a smart choice by keeping good tenants happy. I learned that was a mistake. Don’t miss out on too much money before you learn that as well. Learn from the knowledge of people here, don’t make the same mistakes that we have.

There is a balance where you can be a nice, good landlord while also treating the property (or properties) as a business.

 Do what you want or what makes you feel good, But realize this:  The current tenant has already benefited from below market rents, additionally, she indicated to you that she was moving, and third the previous owner bought the property at a lower price than you and could afford to keep her rent at what she is paying.  Your numbers are much tighter!

Think about this, Move her to market rents, increase of $250 per month.  After 12 months you will have collected an extra $3000.  Throw her a party and present her a $3000 cash gift!!!  Essentially that is what you are doing by not raising her rents.  Just putting this in perspective.  

Treat her with dignity, but if you call yourself an investor then raise her rents.  After that do with your money as you wish! If it makes you feel good give her the cash gift.  I have yet to meet anyone to do that, but know of several "investors" being kind not raising rents.  Just keeping it real!  

I disagree with incremental increases, completely.

She probably changed her mind about moving because she realized how cheap the rent is in her current situation. 

If you are a business person, you will raise the rent to market value with 30 - 60 days notice. Either she can afford it or she can't. Either she will rent it or someone else will.

Even if you kept her at $850, that's $1,200 you are giving away every year.

@Kyle Falkenstein . Being a landlord is sometimes a cruel game especially in the beginning but it’s a business and you have to do what’s best for you!! Because when the roof needs replacing or her compressor on her condenser goes out you can’t call her and ask for 2k she will be like

You’re the landlord!! You need to fix it. Do what you need to do and handle your business don’t worry about that lady if she can afford it great if she can’t great move out.

I give back in other ways I use my personal money to take elderly people where I live shopping in my personal vehicle and I’ll buy there groceries or make homemade food well my girl does I don’t cook. That’s my good deed. When it’s business then game on!!

Good quality tenants are hard to find. So, I would recommend keeping her. Offer to upgrade her unit (new appliances etc) and incrementally creep the rent up slowly. If someone gets a whole new kitchen, they probably wont mind a 10% bump in rents. Then, just increase 5-6% annually and make sure you provide her with VALUE. I am sure she knows that her rent will be higher anywhere else. So, she should be on board with slow increases. But, a good tenant at under market rent is better than sub par tenants at market rent. 

Since she is starting to have trouble with stairs, perhaps you can offer her moving into the lower unit for the market rent of $950?  Could be a win-win and take some of the sting out for her of having her rent jumped up a good bit.

But, if that's not possible, then give her the appropriate notice after closing that the rent will be raised to $XXX.  It is great to have a reasonable and responsible tenant.  And I tend to keep my tenants like that a little below market.  But I think even the "middle ground" you're thinking about at $850/month is too much discount.

What's "fair" for anything, whether it's rentals/services/goods, is market price.  Of course, she won't like her rent being raised $200-$250/month.  But that should not be your concern.  That's the world marching forward.  I wish my expenses stayed the same as what they were 15 years ago too, lol!  However, that is not the way economics tends to work.

@Jill F. So I’ll be living on “dump” side anyways and plan on putting new flooring, appliances and fence while I’m living there. So if she wants she can just move next door. Hopefully she waits at least a year since that’s when I’ll be moving duty stations. Thanks for your input :)

@Jonathan Trimboli I’m all about people being blunt or showing tough love. You’re absolutely right and what I’m trying to tell my wife..the ball will be in the tenants court, she can stay or go especially with $850 still being under market value.

Wanna fathom a guess why she changed her mind and decided to stay?

She is staying because she realized what a great deal she is getting...... and you are going to keep paying that charity if you don't bump the rent. Going to full market is pretty "harsh" considering how long she has been there a s a good tenant, but this is a business.....not a charity. I would feel comfortable going 10-20% below market with stipulations in the lease about future yearly increases.

@Ned J. I definitely agree and love the thought of going to $850 with letting her know in the increase of rent each year in the lease. Thank for your input.

Money from the rents is what pays to fix the property.  You have a lot of large capital items that don't come up every day, but they do cost when the time comes.  Labor and materials go up.  Being "Fair" in my opinion, is providing a well maintained property and charging appropriately so you can maintain that property.