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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Calvin OzanickBusiness Member
Property Manager · Janesville, WI · Member since 2017 · 707 posts · 297 votes
6y
I would say if the difference is like 50-75 under market value that it is not worth raising the rent. Once you get over the $100 mark, then it becomes sort of a necessity.
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San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
6y
I used to look at Craigslist to see what the tenant would see when they got a notice, because that's the first thing they will do - go see what they could get for the same price. We then priced a little below market rent. As mentioned above, you need to look at the cost of a turnover and see how long it takes to recoup it. I told tenants that I raise the rent every year when they were applying, so they'd be ready for it, too.
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Stacy Patlan
Indianapolis, IN · Member since 2016 · 24 posts · 2 votes
6y
I'm the "I really need a property manager" type of landlord. I'm nice about late payments the first 1 or 2 time before putting in place the late fee. But I am yet to raise rent on any of my tenants except for 1 who had so many stupid maintenance issues I couldn't wait for them to send me a 30 day notice!
I have one unit rented at $750 we bought with the tenant in it. Market rent is $950-$1000 but they have like 15 dogs and would almost need gutted in smells so bad. They have never called about issues in the house except the furnace went out (which we knew was coming) We haven't raised rent yet, we bought it sub2 with a very low mortgage balance and payment.
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San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes
6y
Originally posted by @Stacy Patlan:
I'm the "I really need a property manager" type of landlord. I'm nice about late payments the first 1 or 2 time before putting in place the late fee. But I am yet to raise rent on any of my tenants except for 1 who had so many stupid maintenance issues I couldn't wait for them to send me a 30 day notice!
I have one unit rented at $750 we bought with the tenant in it. Market rent is $950-$1000 but they have like 15 dogs and would almost need gutted in smells so bad. They have never called about issues in the house except the furnace went out (which we knew was coming) We haven't raised rent yet, we bought it sub2 with a very low mortgage balance and payment.

Well, on the units you could turn over without having to gut them, it might be time to bump the rent. But, on the one with the 15 dogs, I think I'd let sleeping dogs lie. Yes, I thought that was rather clever :-) But, seriously, I'm not sure how much it would cost to gut it and get it into the condition required to get top rents, like put in nice laminate flooring, get the odor out, maybe put in new cabinets, paint, doors whatever was damaged, etc., but let's say it costs $10,000.
If you are spending $10,000 to get another $250 in rent, $10,000/$250 = 40 months. Plus, maybe a month to do the work. Maybe another month to get it rented? So, add $750 x 2 = $1500 you could have had, = 42 months to recoup, if I'm doing this math correctly. And that's assuming no more vacancies or major damage, etc. And, of course, adjust my numbers if I'm way off on what it costs to renovate these days.
So, in this case, I think I'd leave them alone and just collect the rent until they leave and you have to deal with it. Maybe bump it a little bit that won't make them leave, like $30.
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Jeff T.
Rental Property Investor · Culver City, CA · Member since 2014 · 221 posts · 79 votes
6y
I switched property managers recently and my turnover costs are much lower now. So I have found I’m much less worried about increasing rents to market.
So while I used to keep very low rents for the good tenants I am raising rents closer to market and my cash flow is much better. In fact I was losing money before due to inefficient property management and low rents.
I do think it is market dependent, it’s very easy to fill units in my market so that helps. If that wasn’t the case it might change the way I do things.
It’s been quite a shift for me lately.
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Jordan Jones
Rental Property Investor · Temecula, CA · Member since 2018 · 34 posts · 21 votes
6y
Originally posted by @Corby Goade:
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.

This is a really interesting idea. Do you offer a lower rent increase on a 2 year lease option and a higher increase on the 1 year option? Thanks!

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Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
@Jordan Jones- yes, there are exceptions, but we generally offer 3% increases to good tenants with a two year lease or a 5% increase for a one year lease. There's always the danger of getting too far behind market rents in a quickly appreciating market, but It's generally worked well for us!
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