Raising Rent On Long TIme, Trouble Free Tenant
Residential Landlord · Greenfield, WI · Member since 2013 · 299 posts · 126 votes
In our 4 family, the tenant in #2 has been with us almost 4 years. Never a peep, always pays on time with a smile, pleasant, never asks for anything, no noise complaints, no plugged drains, plugged toilets, addresses me as "Sir"...a dream tenant.
We've recently had some vacancies and bumped up the rents to be more in tune with current times. Even with the higher rent, the response was very, very strong.
I'm reluctant to increase his rent to be equal to the new tenants, but sometimes feel foolish "giving" him $40 a month.
There is a cost involved with tenants moving, obviously, along with the possibility of being vacant for a few months...but with the response to our recent vacancies, even with the higher rent, I'm sure we'd rent it in a heartbeat.
Maybe I should look at the big picture, relax and not try and squeeze the last penny out of the building. It's paid for, and pretty much trouble free.
I'll never forget what my Father, God rest his soul, used to say. "People tell me to charge more rent, but my building is always full. It takes a long time to make up an empty month even at a higher rent."
Leave this guy's rent alone, it's not worth the 40 bucks, right?
I would say leave it. IMO a model tenant like this should be worth something.
Arnie Guida - Although the free $40 might not be fun to give away, like others have said it is probably saving you money over time. What you can do is do a 24hr notice and just come in to talk to him. Tell him you have to raise the rent of the other units as they are well below market price. Tell him you will only raise his $20 because he has been the model tenant. This way he feels like he is getting a deal and you are reasonable.
Identify his concerns, address his concerns before he mentions them, sympathize with him, and tell him what you have to do. Any reasonable man would understand your situation...and you get $20 more per month.
Renting your units below market is NOT saving money over time, it is losing money. It's like someone saying I will pay you $500 for your unit and you tell them, no no... you look like a good tenant I will rent it to you for $460 to save me money.
You're losing $40 a month... And if you believe this sort of thinking you're more likely to not raise rents in the future on other units! So if you have 10 units that are $40 under market in 10 years you will have given away $48,000, or $4,800 per year. Also values of investment property are usually tied into current net income. If you can keep your rents at market and you bring in an additional $4,800 per year, at a 10-cap you've increased the value of your holdings $48,000 dollars as well. So in our hypothetical example bringing your rents to market you bring in an additional $4,800 per year and raise the value of your properties $48,000 for a total difference of $52,800 by bringing the 10 units to market value.
It's a slippery slope. There is NO harm/foul/indecency in renting your units for market value. There is harm of renting them OVER market. Also a tenant is going to not be thrilled about a rent increase, no matter how much it is. It is better to raise it $40, once, than $10 each year for the next 4 years. Also buy raising it all at once you'll make more money as well.
This is an interesting topic and can be a difficult question to answer. A lot of people have mentioned that since the tenant has been so great, you should keep the rent the same to avoid any possible issues or the tenant wanting to leave. However, I would say that works both ways...meaning it sounds like you have been a great landlord as well and the tenant is likely willing to pay slightly more to continue to rent from you.
One thing I have noticed since I have been involved in real estate is that there are nightmare landlords just like there are nightmare tenants, and most tenants do not want to leave a good situation.
My play would be to raise rates slightly ($15-20) this time around. The tenants do need to understand that you are operating a business.
David Krulac - I have just those sorts of rent escalators built into my lease. The secret to the tenant staying is to offer a renewal of the lease for a smaller increase than what the automatic escalator would increase rent. And as I posted earlier, I offer the smaller increase for a 12 month renewal, vs the automatic escalator kicking in for month to month. The ones taking the month to month are looking to move anyway.
absolutely
I inherited one 8 years ago on a SFH that we took back owing me $18,950.
She direct deposits a week early, doesn't want to buy the place, pays her own water & just recently started paying the new city trash tax etc.
8 years of $725/mo is just amazing. Admittedly with some upgrades we could get $825/month, but who cares.
We do not even know her last name, so my wife calls her the 'annuity'.
I, myself have been guilty of not raising rents as aggressively as I should, the above story not with standing. I have a tenant that has rented the same place from me for almost 30 years. I think I raised the rent twice in 30 years. The rent is way too low. I'm good at raising rents between tenants, but the longer a tenant stays, particularly after decades, their rents get behind.
Going through this now, as need to raise the rent on my only Section 8, but they've frozen rent increases for the last 3 years and now only allow 3.5% per year after starting raises up again. Had I raised rent before, even $10 or $20 per month every 2-3 years, we would both be in a better position right now as my only alternative is to give notice, hurting her, or accept the too low rent, hurting me. She's been there almost 15 years, but unfortunately looks like going to have to make her move. Ugh.
A lot of help we were for you Arnie. Looks like half say raise it and half say don't. Difficult decision but at least you have multiple views from each side of the fence. Make your decision based on good business and financial decisions and not emotions.
A local investor with about 50 units recently told me (I asked) that his experience is that he could get away with raising rents by about 20/month before getting too much push back. He gives them the hard story about taxes and/or insurance going up by some higher amount and that he would work with them cause they were "such great tenants".
I have some great tenants at 550/month. The unit could probably fetch 600/month, but there is no way I could increase the rent by 50/month when their late fee is only 27.50/month. I will probably bump them 15/month when their lease renews in April.
In my opinion you have tenants because this is a business. A business to make money. If your screening properly, you should be able to find tenants that are equal to your current tenant in terms of paying on time and respecting the property.
My story:
My tenants moved in 2 years ago with the rent at $1200. At the end of year one, I too thought they were good tenants and did not want to run them off. I did not raise the rent. I kicked myself every day during year 2 for not raising the rent. I took money out of my pocket and basically put it in my tenants because I was soft. Year 3, I raised the rent $50. I have a duplex on a street of duplexes. WIth just a sign in the yard they rent within 1 month. If they wanted to move that was their decision but I was going to get market value for my rental.
Year 4 -- I will probably raise it a small percentage but I will raise it. As my insurance costs and taxes keep going up so too will the rents.
Good luck with your decision!
Here's something to consider: If the decision is close, then it probably doesn't matter much over a number of trials.
I.e. Assuming you're having a tough time making this decision, then just pick one and don't lose sleep over it.
They won't even remember in 6 months. 30 days notice should be sufficient.
Your dad's wisdom makes sense. My thinking would be similar to those who say raise the rent, however I would recommend an even smaller increase, and here's why: you know that tenants will talk to each other about rising rents, and you will be doing your tenant a favor if you only raise his rent $5 per month, so that he can complain about raising costs with the neighbors. Ask him, in exchange for the small increase to not discuss his actual rent with his neighbors. He can sit around and complain and not have to lie! The other tenants won't feel like the are getting gouged if the believe that everyone has to endure the increases.
I have been an excellent customer to my local gas stations, my local grocery stores, my local dry cleaners, etc.... Yet I still pay the same price as a brand new customer. My father had the same philosophy as your father, and he died millions of dollars poorer for it. I let one thing dictate on whether to raise rent or not, The Market. And yes, I have even lowered rent due to market forces, but that is rare.
While granting some benefit to good tenants is OK, not raising rent should not be one of them. Think of this, if current market rent is $1,000 and your twenty year tenant is paying $500, what would you do? And yes, I have had the same tenant for 24 years before they moved, raised the rent every year.
You are running a business, not a housing charity. Your tenants are not your friends, they are your customers. The relationship is professional, not social. Your annual costs go up, and just not insurance and taxes. Every year, you are getting closer to the need for a new roof, new carpeting, new HVAC system, etc... Those items are not cheap!
If your Real Estate investing is a hobby, then treat it like a hobby, ie. Free Rent. But if it is a business, then treat it like a business.
While granting some benefit to good tenants is OK, not raising rent should not be one of them. Think of this, if current market rent is $1,000 and your twenty year tenant is paying $500, what would you do? And yes, I have had the same tenant for 24 years before they moved, raised the rent every year.
You are running a business, not a housing charity. Your tenants are not your friends, they are your customers. The relationship is professional, not social. Your annual costs go up, and just not insurance and taxes. Every year, you are getting closer to the need for a new roof, new carpeting, new HVAC system, etc... Those items are not cheap!
[b]If your Real Estate investing is a hobby, then treat it like a hobby, ie. Free Rent. But if it is a business, then treat it like a business.
There are a lot of smart people on this thread, many of which disagree with you and don't treat real estate as a "hobby". Not everything is black and white as "the market".
I know there are a lot of smart people on BP that disagree with me, and that is fine. But I reserve the right to voice my opinion. Both of my parents passed away over the past two years, and in those two years of taking over their estate, I more than DOUBLED the monthly income.
I welcome other, opposing viewpoints. But please do it respectfully. On more occasions then I can count, I have been accused of making LIFE too "black and white." And while that is true, there are many times that I am able to filter out all the extemperaneous noise and get down to the neccessary facts to make the best decision possible.
Therefore, my opinion is that as an investor, I should be getting Market Rent for my rental, no matter if the tenant has been there a month or ten years.
Someone had posted on a related thread, that raising the rent is a less bitter pill to swallow when accompanied by a small token of appreciation to the tenant - a $50 gift card for example. I plan to try that myself.
For our firm, it's always outside forces that motivate rent increases, most commonly property tax hikes. We've kept rents reasonable for long term tenants -- even a bit below market -- and try to keep the increases to 2-3% every couple of years. So far, so good.
But regardless of economic conditions, and my ability to raise rents, property taxes do one thing: go up. They are a non-market force that's hard to control.
Sorry to revive a dead thread but I'm in a similar situation. I am closing on a property I purchased from my family (living in and managing somewhat for 5 years before the sale). 2 tenants have been there 10 plus years at $800 a month no leases. They never complain, pay early and cause no problems and don't complain even though condition of property hasn't been kept up. Both single people in their 50's.
The market value on the same rentals is $1200 - 1400. Mind you to turn over the rentals and get $1200 I will prob have to spend $5000 in renovations on each unit. So I don't want to lose them or my $800 a month!! And I don't want to take 3 years to get close to market value.
I'd love to here any suggestions.
Everybody's going to have their own priorities, but for me I've been through enough bad tenants that when I find one that doesn't cause problems, pays rent on time, and doesn't complain about anything....I want them to stay.
If someone has been in the property for 10 years and you need to put $5k into it and the rehab takes you 2 months and it takes another month to get a new tenant into it then you're out $8.5k. If the new tenant stays for the 1 year lease and then moves out and you're back doing work and looking for a new tenant then this is going to be the wrong move. But if you do some nice upgrades and are able to get a great tenant that happens to stay a long time then it was the right move. It's hard to say, even if you screen well and find a qualified tenant there's no guarantee they stay beyond the lease. A lot of my best tenants have left to buy their own home. For me, I have a lot of rentals to manage so if I have problem free tenants I want to keep them and I'd rather just invest my time and cash into buying additional properties rather than trying to squeeze a little more out of ideal tenants. Now if the tenants weren't great I have no problem trying to raise their rent.
I'd give them an incentive, tell them that with the rent increase this year that you'll do a carpet cleaning for them.
Another way of looking at this is consider your available time. If you only have 3 rentals, you have the time to fix up a rental if a tenant moves out or to advertise and reshow it at a much higher rental rate. If you have 40 rentals and manage them yourself it might be better to not raise rent in that apartment and have 1 less headache to deal with, or move your rent up very slowly to keep your good tenant.
For $40, I would probably leave it alone.
Rethink the situation in a year and/or when nearby rents really rise. I wouldn't take a $40 "loss" for 10 years, but I would for another year or two just to have a perfect hassle-free tenant.
If you had another tenant, they could cause more than $40 in damage a month. Plus, vacancy costs. Fix-up costs. And, whiny tenants complaining about everything having you come over to fix things all the time.
For $400, I would raise rent. But, not $40. I guess it depends on what your sweet spot is. I would probably raise rent for $100, but I would take $40 any day to have one problem free tenant. I wouldn't take a $40 loss on, say, 10 different tenants just to have ideal tenants. $40 isn't much to me so long as it's only one tenant.
I lived in a rental once where I had lived there a few years with no rent increases. I like to think I was the ideal tenant-- paid on time, usually paid early. Never called with repairs. When the place had issues, I invited the landlord inside to have a seat while his repairman fixed up the place. Pleasant conversations with him. I was quiet as a mouse when his other nearby rentals threw loud parties all the time. Eventually, he said he was going to have to raise rent by $50 a month as nearby rents increased. I understood. I moved soon after, but not really because of the $50. I had just planned on relocating to another city anyway. Even so, I still thought I had a good deal in rent. I would have preferred the rental increases to come slower or more predictably, though, had I planned on staying there anyway. $50 can be a lot for a tenant, but $25/month increase each year might be more palatable and easier on the tenants budget.