How to handle big increases in rent.

Question

I am buying a three family home where all three rents  are well below market rates.The tenants in place have been there for a few years and reportedly all pay on time.Any suggestions how to address the rent increases,which could be as much as three to five hundred dollars each?

JD Martin · Answer

First, you need to know your local laws about rent increases. If there are any.

Beyond that, you should be certain these units are way below market. A lot of times new investors (I assume you are a new investor, since you are asking this question, but maybe not) believe that what they are buying is way undervalued when in fact the units are actually getting at/close to market based on current condition/location/amenities/etc. I also have my doubts since you say they are $300-500 under market. Unless you are talking about $3k places, that's a pretty big spread - are they $300 under market or $500 under market? I can tell you within $100 what any of my properties should be renting for. My $1200 properties are definitely different than my $1000 properties, for a $200 spread example.

If you've hit the first two and you have in fact found a little gold mine, then you should proceed with caution on your tenants, assuming all are month-to-month and can be raised any time. Raising the rent $300-500 on any tenant is virtually going to guarantee you a vacancy, as few people who are renters can absorb that in any kind of short time frame - and even if that's on par with what they would pay to go somewhere else, I suspect they would do so just out of principal. I would probably aim for $100/month, if they want to go under new lease, or maybe $150/month if they want to stay M2M, and let them know there will be another escalation 12 months from now. I think they will still move but it would give you time to absorb the vacancy. Depending on the amount the units rent for, one month's vacancy can/will destroy 12-24 months of increased rent. That doesn't mean you should never raise the rent, but if you are buying something that's underperforming that badly you have some work to do to get it going.

Or you can just go the nuclear option, tell everyone the rent goes up $500/month, let them all move and start over with new tenants. If that's truly the market rate you should have no problem filling the units. It would be an easy way to test your theory about what the rent should be for each unit, anyway.

Frank Procopio · Answer

Would start off slowly and one by one. You dont want to step over dollars to pick up pennies

Heath M. · Answer

Also factor in the work that will need to be done if one does leave.  Do you have enough reserves to paint/fix up one during the month of rent you'll be losing?

Anything over $50-75 would be a stretch in my opinion.  But if you could bring in someone new, an extra $300 a month would recover your costs pretty quick.  Also they'd be your tenants and not inherited tenants.  If given the chance, I'd always prefer to pick mine.

Aigo Pyles · Answer

300 to 500 each is a lot and you may lose that tenant if they wont agree with the increase. So you may present to them your reasons for the increase. It's up to them to decide.

Matt Ziegler · Answer

When we bought a place that was underperforming,it had a fair amount of deferred maintenance.We started by improving the place, this caused the tenants to ask”are you gonna raise the rent”? Of course the answer was yes,we explained why, and we did incremental increases . Some tenants left, which was good. We now have it filled with well screened,qualified tenants.

Good luck

Percy Matsunaga · Answer

@Patrick Reagan

Wow $300! Here is what I would do. mid you need that $300 to cash flow I would definitely let the tenant know that rent ms will be going up and it’s up to them to accept or not. you might lose the potential tenant but an additional $300 for each tenant it great! be prepared to get new tenant in, cause that jump of $300 might be too steep for the current tenant.

Brock Mogensen · Answer

Present the rationale behind your increase to the tenants.  You may want to increase the rent in increments so you don't lose all the tenants at once.  I would increase over a certain time period.

Carleton C. · Answer

@Patrick Reagan Are the current tenants up for renewal? If so, I would just notify them that you are raising rent to market rates. It's up to them to decide if it's worth it or not. $500 per month is a lot to leave on the table.

How to handle big increases in rent.

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