Wife doesn't want to increase rents

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Wife doesn't want to increase rents

Zachary Jensen
Rental Property Investor · San Diego, CA · Member since 2018 · 27 posts · 36 votes

I'm just about to close on my first rental property (house-hacking a duplex in a small town outside of San Diego, CA).  The previous Landlord raised rents 3-5% every year on this property, so it is currently rented for market rent to some great tenants who have taken good care of the place.  My wife is a wonderful person and very generous.  As a result, she doesn't want to continue increasing the rents on a yearly basis.  I could really use some help making the case for the importance of yearly rent increases.  I understand that property taxes increase on a yearly basis and that any maintenance costs also go up on a yearly basis.  What are some of the other reasons for maintaining regular annual rent increases?

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
5y

I see mostly replies that are not local to CA/San Diego.  This implies that they likely do not know the nuances of the local market.

First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.

  • In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%).  If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
  • There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice.  This by-passes any claims of retaliation, discrimination, etc.  Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
  • COVID has identified new risks.  in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc.  Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors.  It was the most stringent in the nation.  It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety).  Fortunately this regulation expired last month.  However, increased risks deserves increased profit to compensate for the increased risks.  These anti eviction rules are likely to result in significant rent increases over the next few years. 
  • Home prices in San Diego rose ~25% county wide in the last year.  To have rents increase the same as the property increase would result in a ~25% rent increase.  That would be illegal on your units.  The rent increases always lag the property increases.  However, this is another indicator that rents are going to go up a lot in the near term.
  • CPI in the last year was highest in many years.  local wages have gone up significantly.  skilled tradesmen (especially plumbers) have increased their costs significantly.  Material cost similarly have increased significantly.  Plywood has risen ~300% since pre-Covid.   This implies your expenses are higher than the previous owner paid last year.
  • Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly.  This implies that regulations could come at any time further limiting rent increases.  What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase?  If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
  • In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason.  I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family).  Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.

I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.

I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.  

As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent.  I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.

The rent increase you are considering (3% to 5%) should occur to protect your investment.

 Good luck

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  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    How does it fit into your end goals?  Is it worth the stress?  Will it push a tenant out?  

    1Reply
  • Jane S.
    Flipper/Rehabber · Colorado Springs, CO · Member since 2016 · 502 posts · 167 votes
    5y

    Tell her if you dont increase the rent they told you they would move out! And SHE will be in charge of marketing.

    If this is a business who is running it? I agree with division of labor. Let her design the kitchen and hire plumbers etc. 

    Every multifamily property I look at has legacy tenants paying bottom dollar (actually pennies) rent, thats probably the reason they are available. I dont even bother.

    Do you want these same issues every time you buy a property?. Just give the tenants their new leases and start cash flowing no need to pick apart every move you make.

    Also you need and MUST HAVE a separate business account IN YOUR NAME so you can be the CFO your accountant requires it! You have one, right? Accountant? Hope its not her mother.

    Unfortunately i can see the writing on the wall the property is in both your names. Make sure the rents are paid into a NONJOINT account. Or cash you can dole out to her weekly for her little shopping trips. Keep the rest for buildig your biz. 

    I’ve been there and didnt like it. Freedom to make decisions and execute is the best high!

    Also if you decide to sell because the rents are in the t******t it will not attract smart buyers who dont want to face double evictions. Besides who knows what the eviction laws will be?????????

    Ask your accountant to do a 5-year projection if you dont raise vs. if you do the 5%.

    Also your cheap rents will attract low class tenants who are very experienced in not paying.

    1Reply
  • Steve Sanderson
    Homeowner · Orange County, CA · Member since 2021 · 7 posts · 1 vote
    5y
    Originally posted by @Dan H.:

    I see mostly replies that are not local to CA/San Diego.  This implies that they likely do not know the nuances of the local market.

    First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.

    • In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%).  If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
    • There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice.  This by-passes any claims of retaliation, discrimination, etc.  Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
    • COVID has identified new risks.  in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc.  Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors.  It was the most stringent in the nation.  It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety).  Fortunately this regulation expired last month.  However, increased risks deserves increased profit to compensate for the increased risks.  These anti eviction rules are likely to result in significant rent increases over the next few years. 
    • Home prices in San Diego rose ~25% county wide in the last year.  To have rents increase the same as the property increase would result in a ~25% rent increase.  That would be illegal on your units.  The rent increases always lag the property increases.  However, this is another indicator that rents are going to go up a lot in the near term.
    • CPI in the last year was highest in many years.  local wages have gone up significantly.  skilled tradesmen (especially plumbers) have increased their costs significantly.  Material cost similarly have increased significantly.  Plywood has risen ~300% since pre-Covid.   This implies your expenses are higher than the previous owner paid last year.
    • Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly.  This implies that regulations could come at any time further limiting rent increases.  What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase?  If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
    • In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason.  I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family).  Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.

    I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.

    I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.  

    As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent.  I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.

    The rent increase you are considering (3% to 5%) should occur to protect your investment.

     Good luck

    I agree with the 3-5% increase leading to a fortunate perspective from your tenant. Anything under 10% seems reasonable, but I’m not currently a landlord, so this is just my opinion.

    0Reply
  • Christina Dillard
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 15 posts · 3 votes
    4y

    Put yourself in the shoes of a tenant who has not had a rental increase in 5, 10, more? years. When they decide to move to another part of your city (due to work change, family needs change, etc.) they will likely be priced out of the market. Reasonable rental increases may be in the best interest of the tenant, as they will be motivated to keep their budget current with the market and thus less likely to get stuck in a non-ideal situation. 

    0Reply
  • Bruce WoodruffPro Member
    Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
    4y
    Originally posted by @Christina Dillard:

    Reasonable rental increases may be in the best interest of the tenant

    The 'best interest of the tenant' is not what will keep the OP in business. He must run a business and do it well....

    Not saying be heartless but he must get market rents to be fair. The tenant needs to stop taking advantage of the situation.

    0Reply
  • Christina Dillard
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 15 posts · 3 votes
    4y
    Bruce, You seem to misunderstand my point. I believe we are in agreement re: the importance of raising rents.
    What's best for their business is he and his wife getting on the same page. He should help her see that to keep rents at market rate is not only an essential business move, but is actually in the best interest of the tenants. Overcoming the perspective that it's mean or heartless to raise rents seems important in their case. Without this, division will continue in the leadership of their business and problems will continue. At the end of the day, you cannot operate as both a business and a charity. 
    0Reply
  • Isaac S.
    Member since 2018 · 563 posts · 562 votes
    4y
    I advise you to find a new wife
    0Reply
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