Rental increases with sale?

Question

Purchasing my first MF property in January. It’s a triplex. Current rents are way below market value, at $1025 currently and going rate is $1250 for the area.

Would it be too much to bump rents up by $75 every 6 months until up to $1250...? Tenants are great. Just not sure what’s reasonable for increase in rents.

Tracy Streich · Answer

@Taylor White   I agree with @Filipe Pereira on this.   There is a fine line of wanting to max that rent and heaping tons of cost on yourself if they decide to move.   If they move and you just have to paint and do new flooring that could cost $5000.  That is 66 months of $75 increase to recoup you money.   I always look at what is just enough for the tenant to think "yeah I'll pay that increase.   That is cheaper than the trouble of moving".   3-4% is usually in that range

Also make sure you look at the lease.   Are they month to month.   You cannot just raise it because you are buying it if they are currently in an unexpired lease term.

Taylor White · Answer

@Filipe Pereira thank you! Much appreciated.

I’ve basically thought it through and leaning towards just a $25 increase for 6 months, and another $25 at the 1 year. So $50 tots for the year. The tenants are great and I’d rather keep them than push them out for a turn over.

Filipe Pereira · Answer

Hi @Taylor White, first off, welcome to the forums!

You're talking about a pretty substantial rent increase here, even if it is spread out over a year +. Before committing to something like this, I would want to get an idea of what their income is. They may not be able to afford $1,250, so you could potentially be setting both of you up for inevitable failure.

Usually one of two things happens in these scenarios:1. The tenant understands that they've gotten a great deal for the last X months and are willing to stay and pay the market rate.

2. They up and move out, leaving you with turnover costs, vacancy and some work to do (which often cost more than what the rent increase would have yielded anyway).

Hopefully for you it goes the path of #1. Best of luck!

David M. · Answer

@Taylor White

Same here...  Just because the market rent rate is "so much," that doesn't mean your tenants can handle it.  If I was a tenant, I wouldn't be budgeting for the "market rate."  I find you really need to creep your rents up, and normally either I never get up to the market rate without having the tenant move out realistically...  Again, its generally better to have a paying tenant.  I think the saying goes something like:  "the evil of good is better."

Good luck.

Sarah Brown · Answer

This is always a careful balance of maximizing profits, but maintaining good tenants.  I try not to price out my good tenants unless its an extreme discrepancy and I can't cashflow.  The cost of turning is significant, and the cost of a bad tenant is even great. I would consider the affordability for the tenant and start there.

Rental increases with sale?

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