Doubling rents without loosing tenants?

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5 Reply

Dwight Cook

OP

Rental Property Investor · New Berlin, NY · Member since 2020 · 23 posts · 12 votes

4y

@Kim Meredith Hampton

@Bjorn Ahlblad

Thank you both for your input!

Do you think i should offer them the two options still? If yes then do you think $700 for 1 year or $750 for Month to month is reasonable?

2 Reply

Kim Meredith HamptonBusiness Member

Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes

4y

@Dwight Cook sounds reasonable.

As a side note, do you have any rent control in your area?

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Dwight Cook

OP

Rental Property Investor · New Berlin, NY · Member since 2020 · 23 posts · 12 votes

4y

@Kim Meredith Hampton

I’ve been looking around and haven’t been able to find anything saying there is. How would I find it out for sure? I’m assuming calling either city or county office building?

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

4y

Check if there are limits on how much you can increase the rents. Give them the two options, but be prepared for vacancies.

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Kim Meredith HamptonBusiness Member

Real Estate Broker · St Petersburg · Member since 2014 · 2k+ posts · 2k+ votes

4y

@Dwight Cook yes, perform some due diligence so you don't get yourself in hot water. Nothing worse than starting out in that direction. Ask some property managers too in that area, they should know the laws of your municipality/area/state

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Tyler LingleBusiness Member

Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes

4y

@Dwight Cook for the month to month option. Keep in mind that one month of vacancy can screw up potentially an entire year's cash flow. My philosophy is to get quality tenants in the door as long as possible, year leases, and slightly raise rents every so often (they'll be unlikely to move out because of a slight rental increase). You'll probably lose these tenants it sounds like because you need to make a big jump. That's okay! Do what you gotta do.

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Dwight Cook

OP

Rental Property Investor · New Berlin, NY · Member since 2020 · 23 posts · 12 votes

4y

@Tyler Lingle

That’s my biggest worry about the month to month. I’d much prefer year lease but I’m not sure if not offering month to month would be the thing to prevent me from keeping one or two of these tenants. I believe the one tenant has been month to month for 30 years now.

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

4y

Originally posted by @Dwight Cook:

I am thinking about offering each tenant two options. 1 year leases for $700 or month to month for $750. But I fear this may be too big of a jump for the long-term tenants.

I would not offer them two options. Do what you need to do and do it as soon as possible. If the law allows you to give 30 days notice, you may be generous and offer them 60 or 90. Other than that, just rip the bandaid off and get over it. If they are half-way intelligent, decent human beings, they will know they've been getting a really good deal all these years.

When the increases are that significant, you may be better off just giving them a termination notice. What you don't want is someone trying to stay even though they can't afford it, then you end up with a bigger mess 3-6 months down the road. Get them out, clean the places up, rent them for market rate with tenants you've screened and selected.

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6 Reply

Tyler LingleBusiness Member

Real Estate Consultant · Indianapolis, IN · Member since 2021 · 440 posts · 292 votes

4y

@Nathan Gesner I agree. Options can actually lead to resentment. Probably best to just have your flat policy.

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Jason Andler

Canton OH · Member since 2019 · 41 posts · 39 votes

4y

@Dwight Cook

I heard this strategy on a podcast and have not had to use it yet but it sounds genius.

Show up with a binder that contains the price you paid and comps to comparable rents in the area. The price you paid is to get a large number in thier head so they are thinking you are going to come in with very high, above market rates. Also, Include what amenities you offer vs the comps and include any of the small repairs you are making. Ask them if they have any issues with the property that need fixed. After you give them some time to digest the information ask them what THEY THINK will be a fair price. They will likely say something a little less than the average of the comps you shown them. If the comps average out at $750 and are all over $700 they might tell you a fair price is $700 or $725. If it's at or above your $700 mark tell them you agree that $700 is fair and will charge them that. If they come in lower then you might need to restate why you think $700 is fair. If that doesn't work you can reccomend that they start looking for another place that better suits thier needs.

If you do this I'd be interested to hear how it works for you.

7 Reply

Scott M.

Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes

4y

I would put in your purchase agreement or sign an addendum that the seller will not sign new leases. Plenty of stories of sellers signing sweetheart deal leaes to Family members / long term tenants when they are on the way out. Don't want them locked in for 5 years.

Colleen F.Pro Member

Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes

4y

@Dwight Cook deliver the unit of the family member vacant is something you can put in the contract. Maybe mom or sis has to go with them. For the rent just offer at the market price possibly with an initial step increase if you don't have rent control.

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

4y

@Dwight Cook keep in mind that market rent assumes a property that has been updated. A unit that has had a tenant for 30 years will require full rehab to get to market rent value. That could cost you $5K to $10K in expenses. An extra $300 a month will give you $3600 a year. That means between rehab costs and vacancy during rehab, you are easily looking at 1.5 to 4 years to break even. I assume the other units have had more recent updates, so rehab costs on those should be smaller.

I am not saying you can't raise rents, but pushing someone from $470 to $800 for a unit that hasn't been improved in 30 years isn't reasonable. Maybe push them up $550 or $600 for now, then try to do some improvements in the unit before pushing them up to $700 or $800.

As far as the tenant getting a family discount, that isn't actually even legal. IRS has specific rules around renting to family members which say they must pay market rent. I would notify that tenant that the family discount is ending at the end of their lease and push them to market rents. I would personally be happy if they left. You don't need relatives of the old owner hanging around.

For the more recent tenants paying $630, I wouldn't go higher than 10% increase.

Keep in mind that when you give people rent increases, they shop the market. If they can get a nicely updated unit for $800 and you jacked rent to $750, they may just pay $50 more and move.

I am not saying to fear vacancy (you shouldn't), but you don't need everyone leaving at the same time either. Take property condition into account when looking at market rates.

8 Reply

Lewis A.

Member since 2021 · 10 posts · 5 votes

4y

Given that the units likely need updating can you raise rent 1 unit at a time? If the tenant stays great, if they move out then you can fix it up and list it, then move to the next.

That way you won’t mess yourself up by having all the tenants leave in one go.

Matt Greer

Real Estate Agent · Mesa, AZ · Member since 2017 · 230 posts · 169 votes

4y

That's a pretty big jump. You'll probably lose a tenant, but I'd rather lose a tenant than keep a disgruntled tenant.

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Russell BrazilBusiness Member

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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

4y

Double the rents? And investors wonder why people hate landlords.

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4 Reply

Matthew Olszak

Real Estate Broker · Chicago, IL · Member since 2015 · 1k+ posts · 2k+ votes

4y

Originally posted by @Joe Splitrock:

@Dwight Cook keep in mind that market rent assumes a property that has been updated. A unit that has had a tenant for 30 years will require full rehab to get to market rent value. That could cost you $5K to $10K in expenses. An extra $300 a month will give you $3600 a year. That means between rehab costs and vacancy during rehab, you are easily looking at 1.5 to 4 years to break even. I assume the other units have had more recent updates, so rehab costs on those should be smaller.

I am not saying you can't raise rents, but pushing someone from $470 to $800 for a unit that hasn't been improved in 30 years isn't reasonable. Maybe push them up $550 or $600 for now, then try to do some improvements in the unit before pushing them up to $700 or $800.

As far as the tenant getting a family discount, that isn't actually even legal. IRS has specific rules around renting to family members which say they must pay market rent. I would notify that tenant that the family discount is ending at the end of their lease and push them to market rents. I would personally be happy if they left. You don't need relatives of the old owner hanging around.

For the more recent tenants paying $630, I wouldn't go higher than 10% increase.

Keep in mind that when you give people rent increases, they shop the market. If they can get a nicely updated unit for $800 and you jacked rent to $750, they may just pay $50 more and move.

I am not saying to fear vacancy (you shouldn't), but you don't need everyone leaving at the same time either. Take property condition into account when looking at market rates.

Yup - unless the last landlord was a fool, those units haven't been updated in 30 years. What I've experienced with very long-term tenants, is usually they rarely call for maintenance issues and just fix things themselves as they are able or put up with it. That's great from a cashflow perspective, in that you have low to no repair costs, but when rehab time comes there is a LOT of deferred maintenance.

I would feel out how they are as tenants. If they give you little to no problems with rent collection and repair requests, bump the rent maybe $50 or so. If they are like any new tenant would be, issue termination notices, rehab, and rent at market rate.

Scott M.

Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes

4y

@Matthew Olszak is spot on. 30 year tenant generally doesn't coincide with "unit in good condition". Generally speaking a lot of deferred maintenance. The ability to raise rents close to market rate might cost you in terms of getting the unit itself up to market condition.

Michael MagnoBusiness Member

Real Estate Agent · Wadsworth, OH · Member since 2017 · 234 posts · 168 votes

4y

I would leave the 2 tenants for now paying the $630, as it sounds much closer to market rent and concentrate on getting the way under market tenants up some, or out and make the necessary repairs to push them to market rent. Once they are at market rent, you can revisit with the tenants you left alone (or raise it slightly).

Matthew Johnson

Jackson, TN · Member since 2017 · 12 posts · 11 votes

4y

Can you try a more incremental approach? Maybe not jump them all the way to market right away but increase some to improve your cash flow without losing all of your tenants. I would consider telling the two lower paying tenants that to be fair you need to raise their rent to $630. Then as tenants move "naturally" in the future do improvements and raise the rents to market for new tenants.

Greg M.

Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes

4y

Originally posted by @Jason Andler:

I heard this strategy on a podcast and have not had to use it yet but it sounds genius.

Show up with a binder that contains the price you paid and comps to comparable rents in the area. The price you paid is to get a large number in thier head so they are thinking you are going to come in with very high, above market rates. Also, Include what amenities you offer vs the comps and include any of the small repairs you are making. Ask them if they have any issues with the property that need fixed. After you give them some time to digest the information ask them what THEY THINK will be a fair price. They will likely say something a little less than the average of the comps you shown them. If the comps average out at $750 and are all over $700 they might tell you a fair price is $700 or $725. If it's at or above your $700 mark tell them you agree that $700 is fair and will charge them that. If they come in lower then you might need to restate why you think $700 is fair. If that doesn't work you can reccomend that they start looking for another place that better suits thier needs.

If you do this I'd be interested to hear how it works for you.

Don't forget to bring some freshly baked cookies to the tenants so they feel appreciated. Also, schedule a masseuse to come over and give them a massage before speaking to them to loosen them up. After they've agreed to the increase, break open a fresh bottle of Remy Martin Louis XIII Cognac for them.

Or back on planet earth, you the landlord determine the rent based on the market and let them know that is what it will be going forward. If they don't want to pay that amount, let them know you'll miss them.

Having them come up with a number and all that other BS just makes them think they have some control in the process. You're the seller, you set the price. While you should always listed to the feedback from the tenants on your price and be prepared to adjust if your survey of the marketplace was wrong, it doesn't mean that there is an automatic negotiation available for them.

2 Reply

Tim Miller

Rental Property Investor · Laurel, MD · Member since 2016 · 378 posts · 382 votes

4y

@Dwight Cook Raising rents to market overnight, be prepared to rehab the units because most will bolt at the first chances they get. Before you raise any rents, double check with some local investors. Because I can't imagine NY not having a limit on how much you can raise rent in a single year. If you really need to get the rents up, I'd start with the 2 at $630. Give them notice that as of Jan. 1, 2022 (or Feb.) rent will increase by $50.00 to $680.00. The one for $470, tell them rent is going up to $550.00 in the same time frame. Same with the $400 tenant, give them notice now that at the end of the lease, rents going up to $450. Depending on the laws, you may be able to raise rents every 6 months. But just let the tenants know this is the plan going forward.

The other option is to clear out one of the lower 2 tenants, rehab the unit and get market rates. Repeat with the other one after the lease ends. Good luck!