First Deal! Now how do I raise the rents?

27 Replies

Hey there Bigger Pockets community. I am in the final stages of closing on my first deal. It is two duplexes on one lot. The lot can be subdivided, which is my plan to add value to the properties as they could then be sold or refinanced individually (eventually). 

My question to you all is some of the tenants have rents that are almost half of what market rents are for similar properties in similar conditions. Some Tenants have been there for 30+ years. What is the best tact for having the discussion with the tenants about raising the rents?

Know the local laws about how much you can raise rent. The pandemic has introduced some new ones in this regard. 

Be confident. This is your property and should be allowed charge what you want.

Print out a rentometer report of the local rates and show the tenant.

Can you keep some of them at lower levels for now and bring the ones vacant up to market value with new leases? This kills me to see, though I completely understand your need to do this as an investor, but it's sad to see the renter that's been there 30+ years need to take on the impact of your investment risk just because you bought during this housing boom...is it worth the risk of them moving out and you likely needing to renovate their unit to make it worth market rents? Case by case basis obviously but my heart goes out to those on fixed incomes/elderly that would have no where else to go. (I live and have been looking to buy my first multi in Biddeford where this is happening house after house. We're going to have a serious homeless problem if something isn't done soon.) 

currebtly closing on my first property where the numbers work to subsidize the lower level rents without shocking them with unsustainable rent in increases to those that truly can't afford it.

@Donald MacMillan

Listen to BP podcast 448 it changed what my strategy will be for this.

Create a binder with picture of the property and the amount you purchased for.

Include other apartments in the the area with same number beds/baths, Sq ft etc.

Ask tenants what they think is fair. They know they are most likely going to be asked to leave when there’s a new landlord. And if so you provided them the local options to move to.

If they still don’t want to pay more and you have to serve them the 60 day notice. Offer “cash for keys” for their deposit on the next place so they don’t just burn you and stay.

I haven’t done this personally. So I’m not sure he success rate. Out of my 4 tenants I’ve only inherited one. And I told them the rent was going up or they needed to leave in 60 days. They paid higher rent for 3 months and I helped them buy a house.

Good luck!

@Chelsea A. It is a difficult situation. There is an young adult relative also living in the unit. I suspect his presence hasn’t been included in the previous landlord tenant at will agreement. It’s tough because the previous land lord didn’t keep up with the markets and also isnt fair to the other tenants at the property. It’s a great unit with a ton of onsite storage I could easily rent it out at market value. I was planning on referring them to many of the housing assistance programs prior to raising rents.

and people wonder why LLs are hated...  well here we have a perfect example..  Someone buying a place and doubling rent on 30 year tenants and  during a freaking pandemic.    These obviously are elderly folks....   the very folks all the covid laws are meant to protect. 

First find out if rent increases are even legal right now in your area.....   I would be calling my attorney post haste.....

Originally posted by @Mary M. :

and people wonder why LLs are hated...  well here we have a perfect example..  Someone buying a place and doubling rent on 30 year tenants and  during a freaking pandemic.    These obviously are elderly folks....   the very folks all the covid laws are meant to protect. 

First find out if rent increases are even legal right now in your area.....   I would be calling my attorney post haste....

What, Mary, is he supposed to.be running a charity? If these tenants wanted more housing security they should have made wiser housing choices. Nobody fed them Stupid Puffs every morning out of a cereal box.

 

Originally posted by @Jim K. :
Originally posted by @Mary M.:

and people wonder why LLs are hated...  well here we have a perfect example..  Someone buying a place and doubling rent on 30 year tenants and  during a freaking pandemic.    These obviously are elderly folks....   the very folks all the covid laws are meant to protect. 

First find out if rent increases are even legal right now in your area.....   I would be calling my attorney post haste....

What, Mary, is he supposed to.be running a charity? If these tenants wanted more housing security they should have made wiser housing choices. Nobody fed them Stupid Puffs every morning out of a cereal box.

 

Why are you blaming the tenants? They are just living their lives ....  They are not at fault here.  But IMO doubling rent is one of the reasons LLs are hated.  And since it is such a hot topic right now I thought I would point it out ....

 

Originally posted by @Mary M. :
Originally posted by @Jim K.:
Originally posted by @Mary M.:

and people wonder why LLs are hated...  well here we have a perfect example..  Someone buying a place and doubling rent on 30 year tenants and  during a freaking pandemic.    These obviously are elderly folks....   the very folks all the covid laws are meant to protect. 

First find out if rent increases are even legal right now in your area.....   I would be calling my attorney post haste....

What, Mary, is he supposed to.be running a charity? If these tenants wanted more housing security they should have made wiser housing choices. Nobody fed them Stupid Puffs every morning out of a cereal box.

 

Why are you blaming the tenants? They are just living their lives ....  They are not at fault here.  But IMO doubling rent is one of the reasons LLs are hated.  And since it is such a hot topic right now I thought I would point it out ....

We're all just living our lives. If the situation is as the OP has posited, it cannot have reasonably escaped these tenants' notice that they've been getting a big break on their rent.

They chose to ride the gravy train until the wheels came off. Well, they're.off now. Sucks to be them. Nobody forced them to stay as long as they did and suck up that good, good gravy until the bitter bottom of the barrel.

 


@Donald MacMillan

I think a standard 5% per year is pretty typical, but of course just post renovations an increase in rents is warranted as long as it's still within market value.  If a tenant moved out it would be unlikely they would find another place in better condition for cheaper further motivating them to stay.

@Donald MacMillan are the low rent units up to todays standards, or would they require a renovation to collect market rents?

Some areas only allow a small increase every year... so in those areas.. if you buy house with tenant that has low rents... they can stay as long as they are paying. So that's the 1st thing you need to determine.

Usually we talk to them. Let them know what market rent would be for their unit AS-IS, and that we don't think it would be fair to increase the rent that high, but we need to increase it because it is so low. Then we ask them what would be fair, and work out something out.

If your property does not cash flow as purchased... chances are you are paying to much. There is something to long time tenants that pay like clockwork at lower than market rents.

Good Luck.

@Stephen Chatto good advice, it is cash flowing as is, but I don’t think it is fair to the other tenants or myself to have one paying significantly lower than the others. The unit as-is could be getting almost twice their current rent. I am considering a few tact’s including recommending public housing vouchers, explaining the capital improvements I intend to make, etc. And if the situation still doesn’t work out I am prepared to offer cash for keys.

@Donald MacMillan It is certainly a tough situation.  You want to ensure your investment is generating reasonable income but you also don't want to impose undue hardship on long-term tenants.  I agree with many of the folks on here talking about having conversations with the tenants and presenting them information about rates in the area (such as those from Rentometer).

Doubling rents would likely be devastating for most tenants but a stepped increase to get rents up to near market numbers over the course of a few years should be a reasonable balance.  This could give the tenants more time to adjust and plan.  Reinvesting some of that money into improvements that will benefit the tenants might also help take the sting out of it.

It may also help for you to run the numbers on a few scenarios if you haven't already.  See what it'd look like if you maintained current rents, took a stepped approach and brought them immediately to market rent.  I'm sure the latter would look the best on paper but it'd be helpful to know what your margins are on the other scenarios and to see what makes the most sense for both you and the tenants.

Best of luck!

@Donald MacMillan Although I am new to the real estate game and don’t own any rental properties (yet). Something I heard on one of the BP podcasts either from Brandon or a guest that stuck with me was a similar situation as this. Whoever it was said they spoke with the “grandfathered” in tenants to get a feel for what they like and don’t like with their apartment/house. For example maybe they’re not happy with the floor in one room or the kitchen is out dated or whatever the case may be. In this particular instance the landlord remodeled or in some way assisted in making their experience as a tenant better and in return the landlord raised the rent which made the tenant more willing to accept the rent increase. As I mentioned before I do not have experience with this personally just passing on a similar scenario I heard from BP. Best of luck!

@Donald MacMillan check out the most recent BP podcast episode where Dion talks about the binder. Show tenants the rental comps in the area and ask them what they think is fair based on the comps. You’ll likely have way more success that way than forcing an increase

@Donald MacMillan these people cannot afford rent increases, but please remove them.

I have seen this a thousand times. Just because they've rented forever, pay low rent, might by lower class as far as income level goes, they probably played the previous landlords games. It was a mutual win win but now new player, new game. They honestly had to know that some day the home would sell and it wouldn't be easy anymore. I feel bad for them sure, and if it were me, you bought the property, it is yours, give them some proper notice.

If they are month to month, DONT increase rent. Give them proper notice you don't want them renting anymore. Don't accept any rent payment in the mean time. If they don't move then move on the removing them.

When I've bought a scenario that is similar to this, I am literally budgeting for time and vacancy to get the property where I want it. These people cannot afford rent increase, I'll say it again.

There're two schools of thought as a landlord.

1. HUGE HIGH RENT, almost creating the bar, but keeping prop up to date. Super maintained. Typically someone who is going for increase in equity and playing those angles.

2. We play the welfare game. You want the bare minimum to live? Here is a bare minimum living space. No upkeep for 30 years. Landlord and tenant ride the train. No maintenance calls, no raising rent, lazy and easy. However, 30 years later (I am assuming your seller owned for quite some time), TVM takes place and seller cashes out.

You bought the bag, but luckily it isn't empty!

@Donald MacMillan Be upfront and honest. Tell them that rent is half of what is should be and you will be raising rents on a future date. Give them time to either move or adjust.

No right answer here. At the end of the day it will be your property and you may do as you wish.

I would take ownership and assess each tenant and their ability to pay and how they conduct themselves the first 4-6 months. Then figure out who I want to move on and raise them 20% or so. The rest after 6 months I would raise 5-10% depending on the situation.  

I had a similar situation a year ago I purchased. The minimum had been done the last 30 years A solid C to C- in a B+ Location. I left everyone alone at current rents, even asked a few that were going to leave to stay. I said I was not changing anything but making repairs they needed. I essentially broke even in the last 15 months. 

A few asked me to always wait until after the third to deposit checks due to Social Security clearing. No problem I told them. Some of the most stress-free tenants ever, luckliy. 

Now fast forward a little over a year and the first two are moving out. I made some minor common improvements and prepped for more this year. The units when they are rerented this summer will be refreshed and will net me about  60% more per unit making this a great investment both in cash flow and value appreciation. 

I am now entering year 25ish in investing starting with a duplex I lived in 1/2 of. All of my units are slightly below market, well maintained, and when I acquire new ones I typically gut renovate them. My turnover is less than 2% a year across my portfolio and all of my tenants are current during COVID but for a house, I acquired in October (I knew they were bad) that have not paid 1$ since. I am sure many people here make better returns than me overall but my portfolio is really stress-free. No 1 way to be an investor, but I always suggest a long-term view unless you are flipping (which I do not do as I learned the hard way I am not good at it). Good luck! 

@Donald MacMillan did you make any repairs to outside of property? i would send a letter giving tenant at least 5 months notice there will be a 15 percent increase. Pros you didnt raise too too much and they may pay. Cons they will leave and now you can update interior and raise to market, may have vacant for 3 months.