I'm renting a SFR well below market. The tenants have been renting for almost a year, we have a month-to-month agreement. They are great tenants and I really hope to keep them but I need to increase the rent by $300 per month which is a 10% increase. What's the best way to do this while retaining the tenant?

That is a pretty hefty increase.  Keep in mind that this may be necessary for you and your budget but make sure you are checking your comps as your tenant certainly will and if they can get a better deal they are likely to leave.  Also consider if they do leave what is the length of time it will take to re-rent with a quality tenant and how much will you be out for vacancy, advertising, and turnover costs.  If you are in a hot market go for it, if they leave maybe you can get even more however if not carefully consider it.  Your problems are yours and the tenant isn't going to care that your expenses have gone up or what the market is, they will mostly be focused on how it will affect their budget.  If you are wanting to build some goodwill maybe you can offer an upgrade that will add value to the property and be something they enjoy as well like a new appliance to replace one that is worn out or update some flooring to lvp which tenants love and is better long term anyway.  I also see you are in CA, is it even legal to raise the rent that much there, if you are in a rent controlled area I would always raise to mkt or at least close so you don't fall behind.  Good luck either way, I am sure others will have some great ideas as well. 

@Adam Martin Thank you! With the increase, the house is still a good deal. I could go up to $400 - $450, but I believe it guarantees them vacating. While we are going through their approval process, I left the listing up and received 25 inquiries in under a week. I was assured then that I was priced too low but moved forward to honor my commitment etc. They want a new washer & dryer (the current one is loud), but I do not want to swap it out since theirs works. Per your suggestion, I may reconsider that since the cost of a new w & d would be covered within 6 months with the increase. 

The house was hard to comp and was listed at the start of the pandemic, but I will start higher in the future and bring pricing down if needed. 

Appreciate your suggestions!

Just raise it.  If its still a deal they will stay.

@Felicia Feliciano thank you. I like your to the point strategy. :)

I agree with the above recommendations. If you are confident you have a superior property and are still below market rents even after increasing, you should just go for it. I always like to add a human element to it and have a candid conversation with the tenant why you are raising their rent and how they are still getting a good deal. I know others may disagree with this approach, but I find that it can help maintain goodwill when done correctly. If they can't afford it, they'll leave and then you can raise rents to market rates. If they can afford it and stay, they'll appreciate your conversation with them. Best of luck!

If this doesnt lite a Fire under you nothing will.

Try timesing $300 time 12 months times 5 years...............lol.

Well, I think you need to be more sensitive to your tenant.  Ask them how much they can afford, since they're not as well off as you are.

Then realize 98% of tenants think they're paying too much already.

Not really a way to do this without hurting feelings :(

Great question, @Melody Rault .

Others have already given a great perspective on this, but here's another angle to come at the problem from.

Let's assume that if you raise rent by $300, the tenants will leave. Now, two things to consider are:

1) How much will it cost you to get a new tenant (marketing and unit turn)

2) How long will it take you to get a new tenant moved in.

Alright, so you said raising rent by $300 is only a 10% bumb, so current monthly rent is $3,000 on a single-family.

How much will it cost you to go in there and get the building rent ready (painting, cleaning, etc..) for the next tenants?

How long will it take you to do that work?

Let's assume you can do the turn in a week, get a new tenant moved in within another week, and the cost to turn is $1,000.

You'll lose around $2,000 all told (between unit turn costs and lost rent).

It'll take you about 7 months to recoup those losses at the new higher rent. Within 1 year with these new tenants you'll have pocketed $1,500 more than if you'd simply kept the old tenants at the previous rent.

But what if you were only to bump the current tenants rent by $150? By the end of the year you'd have made an additional $1,800 (without any of the headache of finding new tenants or doing a unit turn.

We're all about minimizing turn-over, even if that means not getting top dollar for rent. Just another lens to look at the problem through.

Hope that helps!

@Melody Rault this comes down to fair market value. If similar properties (same condition and location) are renting for $400-500 more per month, the $300 increase will not force them to move. Just be sure that you are valuing the property right based on current condition. Ultimately if they move, rent to someone else at a higher rate. 

@Anthony Vicino that breakdown totally helps! Very useful advice. I’m going to use your model to run a few different scenarios. 

@Steve Morris the tenants are far more “well off” than me. They too are property owners but for many reasons are leasing now. They also operate a profitable  business, although their financial position has nothing to do with the increase. I need to manage my portfolio efficiently and maximize it. Thanks for your input. 

@Joe Splitrock thank you for your input! Noted. As @Felicia Feliciano wrote, I need to just increase the rent already.  
Lots of good advice. Thank you all for chiming in.

Has rent in the area increased that much in under a year or did you set the price too low when they rented it?  I'd first find out if there is a cap in how much you can increase the rent.  Then if you want to pull off the band aid, you can offer to get a new washer dryer and sell your current one and explain to them that this is to cover part of the rent increase.

Maybe raise it by $100 or $150. I think $300 is too much if you make a raise at once. Then, after a year, make another raise.

@Aigo Pyles thanks for sharing your thoughts. 

I'll return here with the outcome of my decision. 

No problem! @Melody Rault

@Melody Rault

Slip them some cash under the table each month and they will probably be fine with it.

The tenants negotiated and we landed at a $250 increase. Even at the new rate they are getting a good deal. Thanks again everyone for your input!

@Theresa Harris , I missed your comment somehow. Rents have not increased that much in a year. It's a hard house to comp. I priced it as best I could at that time but only realized once I was in the approval process with them that it was underpriced. I then received dozens of inquiries in under one week and then two offers to pay well above what I was asking! I always thought the house was pretty special but didn't know many others would share my sentiment; the house has its quirks, albeit awesome to me. ;)

@Max T. unsure what slip cash means...

Is this an investment or a charity? $150 below market means you are essentially gifting your renter $1,800 in one year. Why not charge them market rate and give that money to a local charity that really needs it?

I don't "ease" people into a rent increase. Either they can afford it or they can't. If you increase incrementally, it is more likely to cause problems than solutions.

Determine market rate. If there's any question as to whether they can afford it, you may want to get them out and increase on the next occupant. If they are really, really, really good tenants, then you may offer a smaller increase to incentivize them to stay while preventing turnover. There's value in a good renter, but try not to let rents get more than 5% below market.