How to increase tenants rent?

12 Replies

So I just submitted an offer on my first deal. It is a 2800 square foot duplex 6 bed 4 bath (1400 sf on each side)... in a great location. Both sides are currently rented, but the offer is contingent on side B vacating upon closing because I'm planning on living in side B and renting side A. Both sides were severely underpaying for rent. Side A is paying $850 and staying upon closing, side B is paying $650 and leaving upon closing. The number I had in mind for these properties was $1200 a month and checked comparable rentals near by and asked for others opinions on what it should rent for and we all got around the same number... $1,200 a month. How do I go about increasing $850 to $1,200? Overtime, slowly? All at once and risk losing a good paying tenant that has been there for years and plans to be there for at least a couple more? Please help! And feel free to ask questions to clear anything up!

@Allen Humphries you don't say what the term of the lease side A is under, so just be aware that you must honor the existing lease when you take possession. That means that if side A tenants are in month 5 of a 12 month lease you cannot raise their rent until the end of the 12 month lease. If they are on a month-to-month lease you will need to check your state/local laws on how much notice you must provide, its usually 30-60 days notice depending on state/local laws. If it were me, I would give them notice that the rent will be increasing to $1200 upon the termination of their existing lease, and if they would like to stay you are happy to let them, but they must complete a new application and go through your screening process before they sign a new lease with you. Remember, you didn't screen them initially, the prior owner did, so you want to make sure they are up to your standards. Good luck!

Your decisions is dependent on several factors. First, look at the unit. Maybe other 3 bed/2 bath units are renting for $1200, but are they similar? If your unit is very out of date you must upgrade it to get $1200. With that in mind, your true market rent may be $1050 or $1100.

Also, do you have the cash to do a turnover/rehab? Do you have cash to carry the unit for a few months while you turn it over? If not, youre better off moving rent up gradually. If you have cash on hand, you can go right to market and absorb the risk of them leaving.

@Andrew B. These units were built 5 years ago. The only thing I’ve seen nicer than these are single family homes and they’re renting for $1500 plus. It’s minutes to the mall and minutes to the most desired school in the area. And at the end of a dead end street in a nice neighborhood. I do have cash to hold me over until I can get another tenant if need be. Thanks for your response and if this clears anything up for you I’d be happy to hear your thoughts!

IF the true rent given the condition of unit A is $1200, then the tenants probably know they are getting a good deal.  Should them market value and some comparables and increase the rent to $1000 or $1050.  If you increase it $350, you will have a vacancy and not only lose at least one month's rent, but need to do renos to get it up to rental standards and that will cost you as well.

Originally posted by @Allen Humphries :

@Andrew B. These units were built 5 years ago. The only thing I’ve seen nicer than these are single family homes and they’re renting for $1500 plus. It’s minutes to the mall and minutes to the most desired school in the area. And at the end of a dead end street in a nice neighborhood. I do have cash to hold me over until I can get another tenant if need be. Thanks for your response and if this clears anything up for you I’d be happy to hear your thoughts!

Sounds like you are in a very good position to move right to market. If the tenants stay, you get market rent. If they leave, you re-rent it at market. it's a win-win. My final consideration would be your local rental market. Some markets have "rental cycles" where you must find tenants before a specific time period or demand falls off substantially. A good example is college towns, where demand really only exists until the semester starts. I would proceed with caution if that's the case. If youre confident that you can find a tenant in the Nov/Dec timeframe, then go right to market. If you are not as confident, maybe wait until youre closer to a more desirable season. My final thought here would be to remember that "market rent" is a range, not a specific price point. There is no shame in offering $1100 instead of $1200 for purposes of avoiding a turnover.

If there is a significant difference between the market rent and the current tenant paid rent then I would consider offering a renewal rate at the market rent. The tenant will probably be shocked but explain that is what the current rates are and that the previous landlord was renting well below the market. Make sure to follow the lease and all existing laws.

I you’re thinking about giving them a new 1 year lease (with increased rent), I would probably wait until I’ve moved in and find out if they’re good neighbors. What if you give them a new lease and they turn out to be a nightmare? You would go through hell for a year.