Pushback from rent increase in new acquisition

20 Replies

My wife and I recently purchased a multi use rental property. 4 offices down 2 apartments up. The apartments are well below comps. The building is in wonderful condition for the most part especially the interior. Previous owner owned it for 5 years set the rents low, never increased, and didn't maintain the exterior. We spent around $2000 already on exterior maintenance and will need to do another $1000. We own other properties and take pride in providing updated quality units with responsive maintenance. We had already planned on raising rents and decided to let the apartment tenants know well in advance (6 months) so they could have plenty of time to make their decision. One Tenant notified all the tenants in the building of their letter and there's a bunch of drama now lol. They think we should only increase 5% a year. My wife figured this may happen. ("Told you so lol"). To me it's unfortunate, however from a business standpoint I know I'm doing the right thing. I'm shocked to hear one Tenant tell me what I should charge for another tenant. #nothappening

If you're confident in that market and are sure you can fill the units at that new price (or higher upon a turnover) stick to your guns and let them leave if they think the new rents are unreasonable. Maybe they will look around for a new place and discover they can't do better. By giving them a long heads up, that will allow you to complete additional exterior work and they'll have plenty of time to think things over...

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It's always fun when tenants collaborate and attempt to determine what you can do with your property. One thing I think is very important: always notify all the tenants at once so they don't hear it from a neighbor.

Stick to your guns. We live in a (mostly) free society where they can accept what you're offering or they can buy from someone else. If they choose to move on, it's often an indication that you've removed a problematic tenant.

What kind of price hike are you planning? I’m assuming you are looking for commentary and comments from an outsiders viewpoint.

Honestly, good for the tenants. 

Story after story of new owner over-paying, needing to jack rents 30%. Renters financing the high life of previous owner riding off into the sunset. 

Not saying this is you exactly, but give us some numbers.  5% to me is a solid raise.  What are the rents now and what are you proposing? 

@Ryan Hesselberg , I had a similar situation in a property I bought.  I did not raise them automatically to market rents, but did a substantial 15% increase in year 1.  One of the tenants made a big stink, and I explained to her the economics for her.  She was still severely under market (by 30% still), and would not find anything comparable in that price range in the area.  Factor in moving costs, and it was a no brainer for her to stay.  

DO NOT LET THEM TRAIN YOU!  You are the boss and have bills to pay.  Good luck!

Of the properties we've purchased with inherited tenants, in every case they were way under market. One tenant was paying the same rent as when they moved in 17 years ago. I kept her and raised the price but in small increments. She's still well under market but takes wonderful care of the property and it still cash flows so I can live with the under market rent. I have a duplex where we did a turnover of one side and that rent is $210 more than the inherited tenant is paying. Again, this person takes great care of the unit and while I will give him another increase, it will still be well under market. Upon turnovers, we always come all the way up to market and thus don't fear a vacancy at all these days.

@Ryan Hesselberg I would explain to the tenants that the previous owner sold the building at market value, assuming market rents. This puts you in a tough financial situation because the owner never pushed rent increases. Under normal circumstances, you would limit rent increases to 3-5% (in line with inflation). However this is a "catch up" situation, where you need to get closer to market. Encourage them to shop around and tell them you are confident that your rent is still a good value compared to other options (hopefully you did research and that is true). 

I would normally not advise giving people 6 month notice of rent increase. Although well intended, this just prolongs the whole process for no good reason. We give people about 2 weeks to decide on rent increases and we present it as options. Total notice time is 60 days + 2 weeks (required because our lease has 60 day notice requirement).

Just explain to tenant that they have two options, pay the higher rate or give notice to vacate. You may also want to be careful with the office tenants. COVID has been hard on the office space industry and this may not be a good time for large rent increases. 

It is common for tenants to share information on rent prices, which is why it is best to keep it as fair as possible within similar type units. Obviously a bigger unit or commercial versus apartment may be priced differently. 

Originally posted by @Steve Vaughan :

Honestly, good for the tenants. 

Story after story of new owner over-paying, needing to jack rents 30%. Renters financing the high life of previous owner riding off into the sunset. 

Not saying this is you exactly, but give us some numbers.  5% to me is a solid raise.  What are the rents now and what are you proposing? 

 This is kind of what I was thinking as well. Naturally I'm of the mind that renters are free to move on to some other unit, and I'm totally for free market enterprise here, but it also sounds like you are blowing up the building all at once. Percentages don't mean a whole lot without actual numbers. If the current rent is $500/month, market is $800 and you're raising everyone to $800 or they move, then that seems like a letter that everyone in the building gets as @Nathan G. noted above. Conversely, in this case, 5% of $500 might not even be enough to cover increased taxes & insurance.

On a side note, the tenant that printed the letter and sowed discontent would not get a renewal from me at all even above market rates. I don't like trouble makers. I don't think it makes sense for you to send out one letter and expect that tenants won't talk among themselves, but I also don't like gang mentality, wherein the tenant could have come to you directly and said "I can't afford this increase, can we settle at 5%?" or something similar, rather than trying to create a revolution.

EDIT: I just re-read the original post. It sounds like there's only 2 apartment tenants in the building, which isn't much of a revolution. Why didn't you just send both tenants the same letter?

The whole "don't let tenants train you" and "stick to your guns" thing only works if you are okay and are prepared for vacancies.  How hard you should push depends on if you can afford a vacancy in one or all of your units right now.  If you can handle the costs, getting the work done and there is a market to refill them then you can be aggressive and stick to your guns.

If you can't afford it right now then you probably don't want to be super aggressive.  If you can deal with one leaving, then be super aggressive with that one.  Then slowly make your way through the building.  

Doesn't mean that super aggressive means the tenants will walk either.  You may be aggressive and they all agree, or some do and don't.  Point is, you want to make sure you are prepared for worst case before you go being all Mr Tough Landlord Guy.  

If you have a good place, provide value, and are confident in what the market rents are, tell them what your plan is to raise rents and if they push back… getttem outtta there! Business is business. 

Hi Mr and MS tenant 

I am Mike Plante.  I purchased the building you live in.    In 6 months when your lease is up the rent will be going to market rate which is $xxxx

Hopefully you will decide to stay with us.  If not we will understand 

Thank you 


Mike 

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I never like the idea when people say they know what market rent is and the current tennants are paying under it. Especially when it’s a unique property that you really can’t compare and get a good estimate. 

That being said. My experience is rents are up 15-30% just this year.

If they agree 5% per year would a been fair. Ask them to pay you 5% more for the last 4 years, 10% more for the last 3 year, 15% more for the last 2 years, 20% more for last year, and 25% more this year. That’s only fair. It’s probably more fair than 4 years of 5% increases plus 15% for this year. (A 35% increase.)

@Steve Vaughan Rents are $650 for the one bedrooms. The units are large, high quality, and fully updated. I have other other units that are much smaller go for more. Keep in mind these are also in a commercial building with beautiful historical character in a downtown setting. The back unit is being raised from $650 to $850. The front unit is larger with a better view and has tall ceilings and windows like what you would see in an early 1900's commercial 2nd story space. That unit is going from $650 to $850 after lease is up, and then to $1000 the year after that. Keep in mind before we bought it, it was gutted to the studs and completely remodeled. New electrical, plumbing, appliances, etc. They havn't been raised in over 5 years and 5 years ago $650 was below market rents even then for my area. So, yes I'm playing catch up.

@JD Martin Rents are (copied from above to give you more info, but I didn't send same letter because the units aren't similar): $650 for the one bedrooms. The units are large, high quality, and fully updated. I have other other units that are much smaller go for more. Keep in mind these are also in a commercial building with beautiful historical character in a downtown setting. The back unit is being raised from $650 to $850. The front unit is larger with a better view and has tall ceilings and windows like what you would see in an early 1900's commercial 2nd story space. That unit is going from $650 to $850 after lease is up, and then to $1000 the year after that. Keep in mind before we bought it, it was gutted to the studs and completely remodeled. New electrical, plumbing, appliances, etc. They havn't been raised in over 5 years and 5 years ago $650 was below market rents even then for my area. So, yes I'm playing catch up.