New to Rental Property: Rent Increase Situation
Investor · New York, NY · Member since 2020 · 24 posts · 11 votes
New to Rental Property: Rent Increase Situation
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Rental Property Investor · IL · Member since 2015 · 165 posts · 107 votes
5yIf the tenant is willing to stay for awhile longer MTM, it may be worth it as Winter can be difficult to find a tenant. Better to have someone paying rent (even if slightly below market) than an empty unit waiting 'til Spring.
28 Replies
- 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
You can't do anything until the lease is over. What is market value for the property and how does that compare to what they are paying?
- Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes5y
@David Pearson I don't know how experienced your PM is, so I can't comment on whether your should raise or not. I would look at your bottom line very carefully and consider how much money the market rent will bare. If you can get significantly more rent, then don't worry too much about raising when you provide notice of lease renewal, etc. I also think it normally makes sense to start fresh with a new tenant if your manager is going to help you get a great tenant. I have often times seen a lot of C class tenants who complain about previous owners for years, and if you start fresh you get to control the relationship.
Also, have a good tax attorney take over appeals for your RE taxes. This is an ongoing game here in Chicago, and those of us with portfolios know we have to play the game!
- Rental Property Investor · IL · Member since 2015 · 165 posts · 107 votes5y
If the tenant is willing to stay for awhile longer MTM, it may be worth it as Winter can be difficult to find a tenant. Better to have someone paying rent (even if slightly below market) than an empty unit waiting 'til Spring.
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes5y
If the tenant would like to go MTM after the lease expiration in anticipation for moving the Texas in the spring, I wouldn't worry about raising the rent much. I would still ask your property manager to conduct a market analysis of the rents so you can see if your rents are at market.
If it turns out that the rent is below market and the tenant decides to move to Texas, I would raise the rent to market and place a new tenant once they leave.
If the tenant ends up staying after going MTM and the rent is below market, I would indicate you plan to raise the rent and see if they want to resign for fixed term. If not, find a new tenant.
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes5y
@David Pearson - First off, congrats on the property purchase. Where is it at exactly and what is th building makeup?
I'd recommend letting the tenants go month to month at the same rent. Things are so soft with the rental market in Chicago any tenants are good tenants especially if they are taking care of the place. As long as you are getting by for now I wouldn't worry too much about the cash flow.
Who are you using for property management?
Let us know how else we can help!
Quality Builders4.968 Reviews - Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes5y
A couple of questions:
1. How far from market rate is the tenant’s current rent?
2. How confident are you that the tenant will stay if you raise the rent?
Answer to #1 is important because if it isn’t much, I wouldn’t risk it given that you are entering the offseason. Dealing with turnovers during the holidays sucks.
Answer to #2 is important because if you don't think they would move, then you are at less of a risk. We often raise the rents $10 to $20 at lease renewal because we don't think most tenants will move over that small of an increase.
Also consider the expenses associated with re renting that unit. If it's going to cost you one month's rent, plus some general maintenance items, plus vacancy of a few weeks, then you're better off leaving the tenant in place for the time being, with the plan of potentially raising the rent in a few months if they do not move to Texas.
- Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes5y
I would encourage them to sign another lease.....either MTM goes up....$40/$50/$100 month or stays the same if they sign another lease....of course it depends on market rent. How easy is it to rent in the winter in Chicago? Will you have expenses like snow removal and heat if they're not there?
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @John Warren:
@David Pearson I don't know how experienced your PM is, so I can't comment on whether your should raise or not. I would look at your bottom line very carefully and consider how much money the market rent will bare. If you can get significantly more rent, then don't worry too much about raising when you provide notice of lease renewal, etc. I also think it normally makes sense to start fresh with a new tenant if your manager is going to help you get a great tenant. I have often times seen a lot of C class tenants who complain about previous owners for years, and if you start fresh you get to control the relationship.
Also, have a good tax attorney take over appeals for your RE taxes. This is an ongoing game here in Chicago, and those of us with portfolios know we have to play the game!
Hey John! My property manager has been in the industry for around 10 years and they have been managing in the area for a little bit over 8 years I believe. After reviewing the market rent of the neighborhood myself, it looks like rent could be increased to up 7-9%. I'm not sure if this would be considered "significant", what do you think? But I agree with you, I'd rather invest in the relationship and make sure they take care of the property, than trying to get a few hundred dollars until they leave.
I haven't thought about getting a tax attorney. I know tax assessments in my county (Lake) are going to be calculated early next year.
Anyway, thanks for your answer!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Russell W.:
If the tenant is willing to stay for awhile longer MTM, it may be worth it as Winter can be difficult to find a tenant. Better to have someone paying rent (even if slightly below market) than an empty unit waiting 'til Spring.
Hey Russell! That's kind of what I had in mind. Since this is my first property investment, I'd rather try to build up a relationship with the tenant and keep a stable income until they leave. That'll also give me a bit of time to save some cash from cash flow for the new turn refresh paint and such. Thanks for your answer!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Paul De Luca:
If the tenant would like to go MTM after the lease expiration in anticipation for moving the Texas in the spring, I wouldn't worry about raising the rent much. I would still ask your property manager to conduct a market analysis of the rents so you can see if your rents are at market.
If it turns out that the rent is below market and the tenant decides to move to Texas, I would raise the rent to market and place a new tenant once they leave.
If the tenant ends up staying after going MTM and the rent is below market, I would indicate you plan to raise the rent and see if they want to resign for fixed term. If not, find a new tenant.
Hey Paul! Thank you so much for the advice. This is kind of what I had in mind, especially since it's my first RE investment, and I'd like to keep things a bit stable for now. I haven't asked my property manager to conduct a rent market analysis yet, but do you think that this kind of request would be included in the PM fee, or PM usually charge for that? Thank you!
- Lender · Oregon, Hawaii and Texas · Member since 2020 · 43 posts · 18 votes5y
I find a good rule of thumb to only increase rents when placing a new tenant. Keeping a good tenant is golden and the possibility of them leaving from any increase and having a vacancy defeats the rent increase you impose. Just my 2 cents, best of luck!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Jonathan Klemm:
@David Pearson - First off, congrats on the property purchase. Where is it at exactly and what is th building makeup?
I'd recommend letting the tenants go month to month at the same rent. Things are so soft with the rental market in Chicago any tenants are good tenants especially if they are taking care of the place. As long as you are getting by for now I wouldn't worry too much about the cash flow.
Who are you using for property management?
Let us know how else we can help!
Thanks, Jonathan!
The property is located in Round Lake, IL. I'm not sure what you are referring to building makeup.
Thanks for the advice! I am doing business with Shannon, from Concierge Property Management. And so far, she has been doing an awesome job! I'll let know if we are looking for contractors in the area. Do you cover the Lake County area?
David
- Rental Property Investor · Elkhart, IN · Member since 2020 · 22 posts · 52 votes5y
Finding new tenants is costly. I often find a bird in the hand is worth two in the bush. I would suggest keeping the tenants in place at their current rate assuming you are cash flow positive as you mentioned. Keep taking checks to the bank from good tenants as long as you can. Once they move out, then you can raise rents on the new tenants assuming the market supports it.
Good luck!
- Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes5y
@David Pearson
I would check your management agreement with them to confirm that is a service they provide, but it shouldn’t be difficult to do. Your property manager should be able to put something together.
If you have a relationship with a realtor you could ask them to do it too by sending you comps.
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Filipe Pereira:
A couple of questions:
1. How far from market rate is the tenant’s current rent?
2. How confident are you that the tenant will stay if you raise the rent?
Answer to #1 is important because if it isn’t much, I wouldn’t risk it given that you are entering the offseason. Dealing with turnovers during the holidays sucks.
Answer to #2 is important because if you don't think they would move, then you are at less of a risk. We often raise the rents $10 to $20 at lease renewal because we don't think most tenants will move over that small of an increase.
Also consider the expenses associated with re renting that unit. If it's going to cost you one month's rent, plus some general maintenance items, plus vacancy of a few weeks, then you're better off leaving the tenant in place for the time being, with the plan of potentially raising the rent in a few months if they do not move to Texas.
Hey Filipe! Thank you for your response and your advices!
Based on my personal market analysis in the neighborhood, the rent market value of the property would be around 7-9% more. I don't know the answer to question #2, but how would you approach this with them? I just took possession for the house, so it is hard for me to get any signals from them. I know they have been frustrated by the last property management, and they now feel better with the new property management. Even if I increase rent for like $50 a month, and they leave in April or May, that'd be $250 more income from January to May. But if they leave in January due to the rent increase, then one month's rent plus some general maintenance items will end up being $2000+. So based on what you mentioned, it doesn't look like it'd be worth it. What do you think?
Thanks again!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Bruce Lynn:
I would encourage them to sign another lease.....either MTM goes up....$40/$50/$100 month or stays the same if they sign another lease....of course it depends on market rent. How easy is it to rent in the winter in Chicago? Will you have expenses like snow removal and heat if they're not there?
Hey Bruce! Thank you for your response. Based on some conversations between them and the property manager, it looks like they will be moving to Texas anyway, so signing another lease doesn't seem like a potential option for them. If I put them against the wall with that, I'm not sure if they would react positively considering they told me they're planning to move. I don't have much experience with renting in Chicago in the winter, but I assume that with this recent COVID cases wave, I don't believe it's becoming easier. And yes, I would have to take care of snow removal and heat if they'd leave.
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Nicole Galchutt:
I find a good rule of thumb to only increase rents when placing a new tenant. Keeping a good tenant is golden and the possibility of them leaving from any increase and having a vacancy defeats the rent increase you impose. Just my 2 cents, best of luck!
Hey Nicole! Thank you for your response! I'm also leaning towards that option. I'm very new to rental property investment, but I've always been told this rule of thumb. Considering this, keeping a tenant who takes care of the property, and even though I am breaking even with my cash flow, it seems like that would be my best option here. Thanks again!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Garrett Cannizzo:
Finding new tenants is costly. I often find a bird in the hand is worth two in the bush. I would suggest keeping the tenants in place at their current rate assuming you are cash flow positive as you mentioned. Keep taking checks to the bank from good tenants as long as you can. Once they move out, then you can raise rents on the new tenants assuming the market supports it.
Good luck!
Hey Garrett! Thank you for your response! I like that, and I agree with you. That all makes sense. Yes, I am cash flow positive so far, it only has been one month, but base on my reserve calculation, I'll end up being a few dozen dollars positive in cash flow. Thank you for the advice, I really appreciate it!
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Paul De Luca:
@David Pearson
I would check your management agreement with them to confirm that is a service they provide, but it shouldn’t be difficult to do. Your property manager should be able to put something together.
If you have a relationship with a realtor you could ask them to do it too by sending you comps.
I haven't though about reaching out to a realtor, good call. Thanks!
- Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes5y
Originally posted by @David Pearson:
Based on my personal market analysis in the neighborhood, the rent market value of the property would be around 7-9% more. I don't know the answer to question #2, but how would you approach this with them? I just took possession for the house, so it is hard for me to get any signals from them. I know they have been frustrated by the last property management, and they now feel better with the new property management. Even if I increase rent for like $50 a month, and they leave in April or May, that'd be $250 more income from January to May. But if they leave in January due to the rent increase, then one month's rent plus some general maintenance items will end up being $2000+. So based on what you mentioned, it doesn't look like it'd be worth it. What do you think?
Thanks again!
So if you're talking about a $1,000 / rental (which I don't know that the rent is) it's like $70-100. Significant, but not substantially. If you were to raise the rent, I'd do $20 until spring, then another $20 then, unless you're expecting high turnover costs. If you are, then stick with the lower rent, because it will take you a long time to recoup the turnover costs.
Well, if they agree to the $20 bump you'd have a few more month's to feel them out before implementing a higher bump in rent, should you go that route. The initial $20 bump isn't going to make or break you, but it sets the precedent that rent increases DO happen. Hopefully that clarifies things a bit for you. - Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes5y
I would not take the tenants future plans into consideration at all when determining what to do. Does the lease have a clause for a rent increase if they revert to a month to month after their initial year term?
- Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes5y
Originally posted by @David Pearson:
Hi everyone,
My name is David and I purchased my first rental property last month, in the Chicago area. I am out of state and am doing business with a property manager over there. Things have been going smooth with them. They just conducted their initial walk through and the tenants seem to be taking care of the property.
The current tenants had some frustrating experience with the last property manager and have been a little bit defensive with some of our requests. But lately, it's been going well overall.
My property manager wouldn't recommend increasing the rent as the current tenant's lease is ending at the end of the year, and they would like to go month-to-month as they might move to Texas in early spring.
What would be your recommendation for a new real estate investor?
I am thinking that for now, if they are paying their rent, and not trashing the property, it's what I'd want.
Just as a side note, I under estimated the property taxes in the area and won't have much cash flow on the property (below $40 a month after reserve).
Thank you! And nice to meet your all! Happy to be here!
David
We think of our properties as assets that are expected to throw off a required amount of cash. If an asset isn't producing the cash we want, even if it's a new asset, we analyze what we need to do for that asset to produce the cash we want. If the rent on a unit is low compared to the market, we assess how long and what will it cost us to get a new tenant in a unit. If the numbers are favourable then we execute the plan.
So, is the $40/month cash flow acceptable? Let's say it's not & $100/month is the target. If the property/unit is vacated, what's the average days on market for property/units such as yours. If the days on market are long then maybe you put up only making 40/month until this tenant moves out. If the days on market are short then maybe you give the tenant an option of going Month To Month at a higher rent or give them notice & move someone else in. Use data to drive your decision.
- 5yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@David Pearson I doubt they leave sooner with a nominal increase and you could increase your margin a considerable %. Tell them its x dollars month and you will go m2m until say March. Then market rent and renewal if they want. They may or may not go to Texas thats not part of your concern.
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Michael Noto:
I would not take the tenants future plans into consideration at all when determining what to do. Does the lease have a clause for a rent increase if they revert to a month to month after their initial year term?
Hey Michael, thank you for your response! There is no clause about rent increase, but there is a month-to-month clause. I agree that tenants future plans shouldn't influence a business decision. But based on my calculation, it doesn't look like increasing rent at this stage is a good business decision.
- Investor · New York, NY · Member since 2020 · 24 posts · 11 votes5y
Originally posted by @Crystal Smith:
Originally posted by @David Pearson:
Hi everyone,
My name is David and I purchased my first rental property last month, in the Chicago area. I am out of state and am doing business with a property manager over there. Things have been going smooth with them. They just conducted their initial walk through and the tenants seem to be taking care of the property.
The current tenants had some frustrating experience with the last property manager and have been a little bit defensive with some of our requests. But lately, it's been going well overall.
My property manager wouldn't recommend increasing the rent as the current tenant's lease is ending at the end of the year, and they would like to go month-to-month as they might move to Texas in early spring.
What would be your recommendation for a new real estate investor?
I am thinking that for now, if they are paying their rent, and not trashing the property, it's what I'd want.
Just as a side note, I under estimated the property taxes in the area and won't have much cash flow on the property (below $40 a month after reserve).
Thank you! And nice to meet your all! Happy to be here!
David
We think of our properties as assets that are expected to throw off a required amount of cash. If an asset isn't producing the cash we want, even if it's a new asset, we analyze what we need to do for that asset to produce the cash we want. If the rent on a unit is low compared to the market, we assess how long and what will it cost us to get a new tenant in a unit. If the numbers are favourable then we execute the plan.
So, is the $40/month cash flow acceptable? Let's say it's not & $100/month is the target. If the property/unit is vacated, what's the average days on market for property/units such as yours. If the days on market are long then maybe you put up only making 40/month until this tenant moves out. If the days on market are short then maybe you give the tenant an option of going Month To Month at a higher rent or give them notice & move someone else in. Use data to drive your decision.
I think this is a very good way to see it, thanks Crystal! How would you able to get this statistics? I haven't been able to look anything up.
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