Good Tenant (Rent increase)

Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes

I just wanted to know people's opinion on this, if you have a good tenant but their rent is below market value, should you look to increase rent even if it could be pushing them out of the property from an affordability standpoint or just keep the current tenant.

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Eachan Fletcher

Investor · Chicago, IL · Member since 2019 · 10 posts · 15 votes

Lots of great advice in this thread already.

The only thing I might add is combine an increase in rent with an improvement to the tenant's life. For example, perhaps you're aware of some appliances that are near end of life or bathroom fittings that need replaced. Stuff you actually want to do anyway and would eventually get around to regardless.

Then the story becomes we need to raise the rent because it's significantly behind market value, but hey we're also upgrading your x.

They may be a good tenant but you should also be a good landlord, and you deserve to be paid correctly for that.

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Kris L.
San Antonio, TX · Member since 2019 · 930 posts · 836 votes
6y
@Quentin Mitchell
Depends on how below market rent and how difficult it would be to get an equally good tenant in.
If you are talking about a 1k property renting for 800, you need to increase rent to get it to market, but if you go 850 next year, you might keep the tenant. If they give you a 30 day notice over $50, then advertise at market for the new tenant. Of course, if your property is subject to rent control, make sure you follow local regulations.
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Kris L.:
@Quentin Mitchell
Depends on how below market rent and how difficult it would be to get an equally good tenant in.
If you are talking about a 1k property renting for 800, you need to increase rent to get it to market, but if you go 850 next year, you might keep the tenant. If they give you a 30 day notice over $50, then advertise at market for the new tenant. Of course, if your property is subject to rent control, make sure you follow local regulations.
I agree I think there needs to be a signficant difference in order to lose the tenant, this doesn't apply to me just seeing people's prespective for someone who may be experiecning this.

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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
6y
Just start raising slowly, 3 to 5% per year.
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @John Underwood:
Just start raising slowly, 3 to 5% per year.
Yep that is a way to do also.

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Fred Cannon
Rental Property Investor · St Augustine, FL · Member since 2019 · 264 posts · 279 votes
6y
@Quentin Mitchell I always raise the rent. It it is a good tenant only 3%. It it is a slow pay tenant 5% because I usually skip the late fee if they are dependable in the late pay. I they are always a hassle but pay, 10% but hope they move. Ha. But never no rent increase. It you do that you set expectations that the rent will always be the same. I have found that the next renter will be willing to pay more.
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Karen F.
Investor · San Diego, CA · Member since 2015 · 435 posts · 421 votes
6y
I'm in the same boat. I inherited an excellent tenant in a large (old) first floor 1 bedroom, in an old complex in a not so great neighborhood. He was paying $550, month to month, but market rate for the unit was at least $750, maybe even $850, because it's first floor and big, so ideal for a handicapped person. Sec 8 is probably willing to pay $850 for it (all cold flat prices), but I'm sure it would need some reconditioning, should he leave. Shortly after we got the place last late winter, we raised him to $600. He wasn't happy, but of course he stayed. I'm lobbying my husband that we should raise him to $650 as of January 1.
My feeling is that if the tenant's unit is below market, but they're a great tenant, raise it gradually toward market, and consider that you'd probably lose a month if they leave, plus you'd probably have to recondition the unit. As for raising rent every year, most of my units (which are virtually all in old buildings in not so great neighborhood) are already at market rate. If the unit is already at market, why would I try raising the rent? To try to wring another 3% out of the tenant, in the hopes that they might pay a bit more than marke trate, rather than move?
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Karen F.:
I'm in the same boat. I inherited an excellent tenant in a large (old) first floor 1 bedroom, in an old complex in a not so great neighborhood. He was paying $550, month to month, but market rate for the unit was at least $750, maybe even $850, because it's first floor and big, so ideal for a handicapped person. Sec 8 is probably willing to pay $850 for it (all cold flat prices), but I'm sure it would need some reconditioning, should he leave. Shortly after we got the place last late winter, we raised him to $600. He wasn't happy, but of course he stayed. I'm lobbying my husband that we should raise him to $650 as of January 1.
My feeling is that if the tenant's unit is below market, but they're a great tenant, raise it gradually toward market, and consider that you'd probably lose a month if they leave, plus you'd probably have to recondition the unit. As for raising rent every year, most of my units (which are virtually all in old buildings in not so great neighborhood) are already at market rate. If the unit is already at market, why would I try raising the rent? To try to wring another 3% out of the tenant, in the hopes that they might pay a bit more than marke trate, rather than move?
Yes I think gradually raise rent but when you do that, also take into consideration that while the tenants are in there you can make gradual improvements to justify the increase, then if they do move you would have less things to do for the turnover.

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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
I tend to look at all parameters - if I raise rent and they leave how long will the unit be vacant - then I try to analyze the amount in my increase and see which brings in more $$.
For example if i rent a unit for 1500/mo and i want to bring the rent up to say 1700/mo that is 200/mo. If the tenant leaves when i give that notice and the unit is vacant for one month it would take 8.5 months of increased rent to recoup that one month loss.
So i always try to keep tenants and increase rent in small increments
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Mary M.:
I tend to look at all parameters - if I raise rent and they leave how long will the unit be vacant - then I try to analyze the amount in my increase and see which brings in more $$.
For example if i rent a unit for 1500/mo and i want to bring the rent up to say 1700/mo that is 200/mo. If the tenant leaves when i give that notice and the unit is vacant for one month it would take 8.5 months of increased rent to recoup that one month loss.
So i always try to keep tenants and increase rent in small increments
Smart and yes rent increases don't always mean more cash flow considering the above statement you made. Not mention good tenants definitely hold alot of value.

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Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Quentin Mitchell
If you’re consistently $100 below market rent, you’re losing $1,200 a year. $6,000 in 5 years. $12,000 in 10 years. In 10 years, investment returns of 7%, you’re losing $17,102. You just gave your long term tenant a $17,102 discount. That’s very generous of you.
My last duplex I just purchased had $1,100 rents
per side. I wrote up a purchase agreement that stated the duplex must be delivered empty. I did some cosmetic upgrades that cost me about $4,000, and had a 1 month vacancy for both sides. Now rents are $1,500 and $1,450. Short term losses followed by huge long term gains.
Having rents below market rent rate is just bad business policy. There are lots of great tenants out there. If your tenant can not afford the rent, they should move.
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Anthony Wick:
@Quentin Mitchell
If you’re consistently $100 below market rent, you’re losing $1,200 a year. $6,000 in 5 years. $12,000 in 10 years. In 10 years, investment returns of 7%, you’re losing $17,102. You just gave your long term tenant a $17,102 discount. That’s very generous of you.
My last duplex I just purchased had $1,100 rents
per side. I wrote up a purchase agreement that stated the duplex must be delivered empty. I did some cosmetic upgrades that cost me about $4,000, and had a 1 month vacancy for both sides. Now rents are $1,500 and $1,450. Short term losses followed by huge long term gains.
Having rents below market rent rate is just bad business policy. There are lots of great tenants out there. If your tenant can not afford the rent, they should move.
In an extreme situation you must raise rents and I agree that there are more good tenants out there, but for the lower end of the rent difference it could make more sense to keep a good tenant in there to help to continue to cash at the very least until make the comestic upgrades to make the transition to the next tenant easier.

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
6y
It depends on how far below market they are. I don't recommend you let your rent get more than 10% below market and that's for a superior tenant that always pays early, takes excellent care of the property, communicates well, etc.
I always recommend one increase. Incremental increases of small amounts just confuse the issue and delay the inevitable problems. Either your tenant can afford the place and recognize the value, or they can't.
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
I feel there is more to “good business” than just $$$$. Good tenants are worth a lot. Not having to flip a unit every years is worth a lot. Not having one month per year of vacancy is worth a lot.

How much each is worth is something each LL will need to decide.
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Mark F.
Rental Property Investor · Northern NJ · Member since 2019 · 672 posts · 677 votes
6y
Great thread. Question, how often to raise rent on below market tenant? Right now my inherited tenant is 20% below market value and I'm doing a $50 increase when I take over. Tenant is on M2M lease.
Debating on a 6 month or 1 year wait to increase another $50?
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Mary M.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
@Mark F. check with your local laws to see if there are any restrictions etc.
Then I think only you can make that calculus
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Mark F.
Rental Property Investor · Northern NJ · Member since 2019 · 672 posts · 677 votes
6y
@Mary Mitchell I've checked and the only restrictions are "must be reasonable" and has to be given 30 days, no exceptions.
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Jordan Jones
Rental Property Investor · Temecula, CA · Member since 2018 · 34 posts · 21 votes
6y
Great thread, and very thoughtful responses from many people. I have a similar situation right now and spent a very long time thinking about what to do.

@Quentin Mitchell I considered all the things mentioned above, but I also took into account that the tenant is very low maintenance. I have a very small portfolio of single family homes and I also work full time -- so in my thought process the fact that he was very low maintenance was really important. I never hear from the guy. A high maintenance client can really disrupt your life and make you less productive -- especially if real estate is something you do on the side. I decided to raise his rent 4% this year and he was fine with it.
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Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Mark F.:
Great thread. Question, how often to raise rent on below market tenant? Right now my inherited tenant is 20% below market value and I'm doing a $50 increase when I take over. Tenant is on M2M lease.
Debating on a 6 month or 1 year wait to increase another $50?
@Mark Franks:
If you just inherited the tenant maybe wait until you get a better gauge of who they are as a tenant before you try to lock them up long term. After you see they a good tenant then gradually increase rent, also a few cosmetic enhancements can go along way in justifying the rent increase and their preception of the increase.

2 Reply
Quentin Mitchell
OP
Investor · Chicago, IL · Member since 2016 · 197 posts · 105 votes
6y
Originally posted by @Jordan Jones:
Great thread, and very thoughtful responses from many people. I have a similar situation right now and spent a very long time thinking about what to do.

@Quentin Mitchell I considered all the things mentioned above, but I also took into account that the tenant is very low maintenance. I have a very small portfolio of single family homes and I also work full time -- so in my thought process the fact that he was very low maintenance was really important. I never hear from the guy. A high maintenance client can really disrupt your life and make you less productive -- especially if real estate is something you do on the side. I decided to raise his rent 4% this year and he was fine with it.
@Jordan Jones:
I think that is a great approach and you are right low maintence tenants are defintely worth alot in my book, I feel that there is no right one answer because all circumstances are different and people have to do what is best for personal situation and that is why different feedback from different people is good.

Good luck.

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Renard Miller
Investor · Hampton Roads, VA · Member since 2017 · 35 posts · 21 votes
6y
@Quentin Mitchell
We tend to only raise the rent when we have signaled to them the raise was coming a year out. We put the next year’s rent in the lease they sign. Otherwise, we just leave it the same. We find that people appreciate the notice and we can hold the rent steady for residents we want to keep under all circumstances.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Quentin Mitchell most people will not leave over a small rent increase. Everything goes up in cost. My mortgages go up every year as taxes and insurance increase.
The question is how high is your rent compared to other equal or better options.
The trouble with "market rent" is that term is very subjective. You need to be realistic of the rents your property would get in current condition. Half the time people compare the newly renovated property down the road with their apartment that has old appliances, stained carpet and needs a paint job. You have to consider how much money will it take to get your property up to market value. My point is make sure you are comparing apples to apples.
Vacancy is the largest expense that most landlords will incur. Vacancy has three parts. Loss of rents, rehab and leasing expense. A one month vacancy of a $700 unit could easily cost several thousand dollars when you figure in all the costs.
I keep rents in pace with the market, but I also take into account condition. We look to just push small increases and keep the tenants happy and in the property.
On the flip side, there are property management companies in my city that push large increases every year. I see those properties turn every year. I am sure some people pay the added expense, but I also know that jacking rents will force some tenants to shop the market. So although people don't always move due to rent increases, it definitely encourages a tenant to shop around. Just make sure when they do shop that your price is competitive.
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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
Absolutely, you are running a business and the goal is to create revenue. We do this all of the time. Poor tenants, which we don't have very often, get a 30 day notice at renewal time. Good tenants get a lease renewal letter with two options for length of a lease- usually one or two years, and each of those options include an increase that we are comfortable with. The tenant gets to chose which increase they want and feels like they had a say in the situation. Works like a charm and I have not had a conversation with a tenant about a rent increase in nearly ten years.
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Eachan Fletcher
Investor · Chicago, IL · Member since 2019 · 10 posts · 15 votes
6y
Lots of great advice in this thread already.
The only thing I might add is combine an increase in rent with an improvement to the tenant's life. For example, perhaps you're aware of some appliances that are near end of life or bathroom fittings that need replaced. Stuff you actually want to do anyway and would eventually get around to regardless.
Then the story becomes we need to raise the rent because it's significantly behind market value, but hey we're also upgrading your x.
They may be a good tenant but you should also be a good landlord, and you deserve to be paid correctly for that.
5 Reply
Brent Paul
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
6y
I think it depends on how far away they are from market rent and condition of the property. If it will require some extensive renovation to get rented for the next tenant and to be at market rent you might do a small increase like 3%.
If they are paying 900 and market rate is 1500 then I would say something needs to happen. Sometimes it makes the tenant angry and they do leave. But the extra money you get in rent hopefully makes up for that. I see it quite often where a property is listed well below market rent. I'm not sure if they are afraid the tenant will leave or if they really don't know what they have. Ran into an older gentleman near me that will be selling his 3 rental properties in a college town. When we talked about it I found out he was about 200 dollars below market on each of his properties. He is afraid of having the place vacant and trying to find another renter in there. All of his tenants have been renting from him for 10+ years.
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Anthony Wick
Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
6y
@Joe Splitrock
Excellent excellent excellent.
I always use the term “market rate”. Which means, to me, what similar units are fetching. Just like you said. That’s why I do not say; “raise rents 3-5% every year”. I have a unit right now that is due up in a few months. I may not raise rent at all, as they are paying what the current market rate is, if not about $20 over. While they probably won’t move over a $25 increase, the fact is, if they did move I would only be able to get what they’re currently paying.
So, while I’m in every post saying “raise to market rate immediately”, you have to know what that rate truly is.
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