I want to start by saying I purchased a 4 family during the pandemic.
The tenants were paying around $450 for two apartments I would normally rent for $800-900 and $650 for an apartment I would normally rent from $1100-1200 so I added a contingency in the purchase agreement that the tenants must agree to a rent increase to $600 and $800 respectively but as you can see this is still quite a bit under the market price.
I don’t want to seem insensitive or anything and they are all good tenants but I am losing money on this property all the while making a ton of improvements to it.
Thanks for the advice in advance!
This is a common question. My advice:
1. Give them 60 days notice to vacate, move them out, then rent the units at market rate. Odds are pretty strong that they can't afford market rate and they will not be pleasant to deal with if you try increasing them 50% or whatever.
2. Do not raise rent in steps. If you decide to keep the renters, they need to pay the higher rate. If you do increases in small steps, it is likely to cause confusion and they will eventually reach a point they can't keep up and then you'll have a bigger problem on your hands. Either they can handle the big raise or they can't.
If they are honest with themselves, they'll understand. They've been renting below market and getting a real good deal but those days are over. They can pay you a fair price or move on.
By the way, do the math on what you would lose if you kept them at below-market rates. Even with your planned increases, you are approximately $500 below market. That's $6,000 a year in lost income. Looking at it a different way, you are subsidizing your tenants with a payment of $200 - $300 a month! If you want to be charitable, rent the apartments at market rate and then donate $500 a month to people in Africa that can't even get a drink of clean water. Your tenants will find something affordable and you may save some lives at the same time.