Feeling bad, Older tenant, Under market value

22 Replies

I feel bad.  One of my tenants is in her upper 60's, she works for a temp agency and has difficulty paying her bills.  She is never late and hasn't missed a payment.  She's been living in the building for six years.  Her daughter lives with her, but her part-time work at Starbucks doesn't pay enough to make a great impact on paying the bills.

The oil tank that supplies this tenant's unit needs to be replaced.  I'm looking at a cost of about $1500-2000 for that work.

The monthly rent is $925 for a nice two bedroom.  It was raised from $900 last February.  She is well below market rent.  I am getting $1025 for the identical unit above her.  The market rate for either of these units is about $1100.  

I discussed raising the rent with her, she claims she cannot afford any more, maybe $25 she offered.

I feel bad.  On the one hand my rental should be at the market rate, on the other hand, I have a nice tenant who cannot afford to pay the market rate, not for what she has currently.  Do I raise the rent and force her out?  Do I bite the bullet and keep her?  What happens in 5 years when she can't find a job at all?

If she'll pay $25 more a month, I'd take that. And I'd raise the rent $25/mo every year. (That's a little under 3%, which is a reasonable proxy for inflation.)

To me, it's less about the fact that she's nice, older, or in a tough spot, but the fact that she reliably pays her rent and wants to stay is worth a lot to a landlord.

@Ian Handel  

Congrats on being an investor.   

Let us do this.    

I will pay her 925. rent for a month if you give her a free months rent.   Let's give her September and November free.  

Maybe someone else will chime in and offer up a solution. 

It is good you are concerned for your tenants well being,

$25 is a fair raise and she agreed to it which is good.

I don't know your area, but if you raise it to $1025 and force her out.

Then you have a vacancy.  How quickly would you fill her spot?

A 10% discount off of market rent to keep a solid tenant seems like a good idea.  

That is kind of the strategy I plan to use. 

If you're making a decent monthly profit with her paying $950/month then I personally would be happy with it since she's a good tenant, pays ontime and wants to be there. If she had to move cause you wanted to get market rent, you take a gamble and your new market rent tenant could be a nightmare. 

My philosophy is to try to keep existing tenants at midpoint between where they are and where they should be.  If she's at $925 and market rent is really $1100, that would be splitting the difference and increasing rent by $90.

If you keep her well below midpoint, the gulf is going to get wider and it's never going to get any easier.  How long are you willing to subsidize her?  Did market rent go up more than $50 this past year?

What would a vacancy cost you?  My last one cost $500.  Which can be recouped in 3 months by being able to charge market rent.  How confident do you feel with the market rent?  You could rent it quickly for that?

Her longevity is worth a lot in my book, if she is taking care of the unit.  Are your other tenants staying as long? We've kept tenants when it doesn't make financial sense, you have to follow your gut and mentally write if off as charity if need be.

Are there programs she qualifies for and isn't tapping into to help her money go farther?  Reduced utility rates?  Senior housing programs?  Would it be less stress on her to have a cheaper place?  Can you use your networks and influence to find her a cheaper place?

@Michele Fischer  is asking all the questions that come to my mind. If she's been a good tenant (and it sounds like shes been ideal), its probably worth a few hours of playing social worker to see if you can raise rent a bit without impacting her bottom line. Its also worth seeing whether your area has a short waitlist for a Section 8 voucher for her (assuming your rents are low enough for her to use it at her current residence at the rent you'd like to charge). 

Conversely, if a vacancy costs you a months rent, that will take about a year to recoup. If you've had good luck in tenant vetting, you probably don't have much risk. Otherwise, be ready for whatever usual chance you have of nabbing a crappy tenant. 

As for the moral obligation to keep a tenant at a rate they can afford, it would weigh on me as well. If it was an acceptably small gap between what they can afford and market rate, I'd personally keep that good tenant hands down. If its large enough to make for an issue, as its apparently getting to be for you, then I would certainly help her find a new unit. Perhaps you have a more affordable one elsewhere, or I'm sure a fellow landlord in town does. Part of being a professional in any business involves being able to sleep at night. Do as much as you feel you need to do to sleep soundly. You usually can't take back moving a tenant out. 

I'd take her offer. Usually my rents are below market or the premium rent that might be obtained, that's why a vacancy is rare. A bird in hand is worth two in the bush.

So long as she keeps her rent confidential among other tenants I'd rather get my money, even late and always get it than deal with vacancies.

I hear LLs say the place can rent for X dollars, usually not with steady income, as you raise rents you increase competition with other units, I'd rather have a property being paid for consistently than trying to live off of it. That day will come soon enough.

Look at the bigger picture too, if you're feeling bad you're probably failing in your community and social responsibilities, meeting those can bring you more business than a hundred bucks a door.  But, you certainly can't pay expenses for others either.

Raise the rent only by the $25 that she said she could afford. Sounds like she is a tenant you are lucky to have. Re-evaluate the situation next year and see if it is still working for you. Don't feel you need to charge market rate or raise the rent every year. Every turnover will cost you. Not only will you lose rent during the vacancy, you will also incur utility costs, marketing costs, and make-ready costs. Not to mention the time it takes to do tenant screening, selection, and move-in.

We purposely stay below market in our rents. Long tenancies pay off. Out of 15 rental units, years tenants have been in place: one 25+ years, one 20+ years, three 10+ years, four 5+ years and six less than 5 years. We strive to keep tenants in place and act swiftly when a tenant does not keep to the terms of the rental agreement, either to guide them back to the terms or to guide them out.

The cost of the oil tank replacement should not factor in here. That should be covered by your reserve account as a capital expense. 

I agree with other's here, losing a steady paying tenant may not be worth the loss you'll take with a vacancy and turn-over costs. I would definitely take the $25 she offered and keep her.  Then re-evaluate in a year. 

I recently raised a rent on a good tenant by only $10 because she wanted to sign a new yearlong  lease. I think that even a small increase sends the message that you're running a business.  Seems like in a year, the barista daughter could maybe kick in another $10 or $15 a month? 

I understand where you're coming from. I was in a similar situation that I would  handle differently if I had to do it over. I kept a tenant's rent artificially low for way too long. As other's have stated, there's a difference between somewhat below market as a sort of "bonus' for  a good tenant, and ridiculously below market.  

I have one tenant who is substantially below market right now, because a) she's been there almost 20 years, and is low-maintenance, and pays on time, and b) because her unit really needs some substantial updates that I just haven't been able to make happen. When they do, the rent will go up, but as @Marcia Maynard  said, a repair/replacement like your oil tank situation really shouldn't factor into an increase, but I do understand how painful that can be when the tenant is enjoying a particularly low rent. 

Whenever I send a letter to raise someone's rent, I include the date of their last increase along with a line saying that "due to increased costs of utilities, insurance, and other costs," they should expect a small increase annually. Some years I raise it, some years I don't. 

Best of luck!

This is the one problem I see with self-managing your own properties; your emotions get in the game. It happens to all of us. My thought is however that if you want to run a charity you might have gotten into the wrong business.

Don't get me wrong, what you are battling is an honorable battle. But at what cost does it come to you? What are you leaving on the table? The main goal for an investor is to 1.) Increase NOI and 2.) Increase overall value of property which is done by increasing NOI all the while reducing your expenses.

I will say however that the rate you are getting for your identical unit is the Market Rate and NOT the Rental Rate. Your Rental Rate is the rate you are charging for current tenants and the Market Rate is what you would charge a new incoming tenant. Rental Rates in my area are usually 3-7% below Market. 

Another way to look at it is the cost of finding and leasing to a new resident if she is unable to pay her rent. With the industry average turn cost for a two bedroom unit of $1,500 you may face some short term expenses that may be hard on the pocketbook if you do not have a wide cashflow spread.

Lastly, you might consider the conversation with this tenant that if she is unable to pay the Rental Rate she may work off the balance each month in return for duties such as taking out trash, cleaning common areas, yard work etc.

Depending how long she's been there, it'll probably cost you a chunk to update/renovate the place before re-renting it. I think if she's already struggling--yet still makes paying rent priority--you should keep the rent where it is. Or perhaps instead of the $25 increase she said she thinks she can handle, only increase it about $10.

If she's already struggling--and she tells you--yet you keep raising rent, she might start having trouble paying. I doubt either of you want that. Keep a good thing going! Less than $200 under market rent isn't that bad at all.

In your post you say in your building.  Is there anything she could do to help you out around the building that you could give her a monthly credit for maintaining?  Sweeping the entry ways, vacuuming hallway etc?

I have to say I don't agree to retain her at this cost.   The real question is not what she can afford but rather what you want to absorb to avoid the turnover.  I had a tenant talking about what she couldn't afford and then she went and bought a house so saying things doesn't always mean they are true. Not saying this is true of your tenant but it happens. What are you willing to have the unit rent at below the market in order to avoid the turnover?   If the difference is not big between your desired rent and her affordable rent ok but if it is more then you can afford you need to take the turnover and move on.   In the end if she really can't afford it you are delaying the inevitable by keeping her rent  below market.  Eventually she will need to move out.   If you raise by $25.00 the starbucks employed daughter might need to kick more in or work more. I am assuming a grown daughter given your tenants age.   If you need to raise it  to maintain a reasonable rent I would do it with some incremental increase making sure there is ample opportunity to meet the rent or plan a move.

You could also refer her to electric subsidy programs ect. if she might qualify.  I wouldn't get into giving her jobs to do again it just delays what you know will have to happen and I it has its own pitfalls. My thoughts, I know it is maybe a bit harder then others.

@Michael Q. What a generous offer! If @Ian Handel  takes you up on it, between the two of you, you could actually buy down her rent for a year and make it easy for her to afford! 

@Ian Handel  

 It looks as if you have a consensus here... Keep a reliable tenant in place and raise her rent by $25. It is a win-win.

@Ian Handel  

Personally I would raise the rent to within $50 of the apartment as long as your vacany won't cost you alot of money. You are losing alot of money in loss rent $175, tht's $1,740 a year. Remember the long she stays in the unit you it is going to cost you money to freshen up the unit because of wear and tear by your tenant PLUS you haven't put money revitalizing it. So the cost to bring the unit up with cost more money.

I let a great tenant stay without raising his rent to market because I needed new carpet. The killer is I will still need new carpet next tenant a I lost the $600 it cost me to replace the carpet in loss potential. It worked for other reasons but financially, not my best move :) While I love great tenants, I have nice places in great areas that I usually can get refilled just fine.

@Ian Handel  

I personally would leave the rent at $925.00 if I was making decent cash flow. In the big picture what is $1200.00 per year not really much. Sometimes folks need help. If this lady is a great tenant like you say I would help her. I am a firm believer that in life you have to give back and help folks that try to help their self. With this type of situation I personally would not increase her rent. Just imagine running her off and getting 2 or 3 bad tenants in a row(Karma) how much could that cost? If you are really in need of that $100.00 per month increase rents for the other tenants you have, since market rents will bare $1100.00.

I am sure there will be other investors on here that will disagree with me, but with this we will have to agree to disagree.          

I'm a bird in the hand type guy as well, I'd take the offered extra $25 though. I've rarely ever had a magical turnover that didn't either take time to get it rented or needed some $$ to make rent ready again. Would you have to invest money to re-rent it to someone else. repaint, new stove, etc? If so, I'd let her stay another six years and bump it up gently. After six years renting, I'd be willing to bet that you would have to repaint the whole place. She may take care of the place and it looks ok, but when it's empty it'll look a whole lot more tired paint / flooring wise.

I had a similar tenant and raised the rent every year by the minimum $30/month.

For 11 years she paid her water bills, did direct deposits a week before the 1st of each month & took good care of the place & never complained.

Admittedly the home originally cost me $22K, & I did very little to it over the years.

I sold it 2 years ago for $42K to a fellow investor & she is still there paying the same rents.

Tenants like these are like gold nuggets.

I just stole an elderly tenant from another landlord who moved a young punk above her in a duplex.The woman had been there 9 years & just wanted peace & quiet. She drives a school bus & is up @ 4am & jumped at $750 for a small unit we have.

in my eyes running a real estate buy and hold is like running a company. High turnover means something is wrong and low turnover generally means things are going right. When I get tenants my first objective is to keep then as long as possible. I would purposely under price my units for the right ppl by $100-$150.  My logic is They will tend to take care of the place better, complain less, and be overall better tenants because they know they won't find a better deal.  My benefit would be less turnover, less agent fees, less gaps in rent, less reconditioning costs for new tenants, that would easily add up to $2000-3000 vs $1200-$1600, but most importantly less stress and risk of getting a bad tenant.  

This is what i would do.

p.s. there was one podcast guest who said if you up the rent, do something nice like new upgrade or appliance, so they feel good about it. It's about making everyone happy and in turn the owner Wil be happy

Originally posted by @Phil C.:

p.s. there was one podcast guest who said if you up the rent, do something nice like new upgrade or appliance, so they feel good about it. It's about making everyone happy and in turn the owner Wil be happy

 we have done exactly that with two elderly long term tenants.

We discovered from a grandson that one was not able to use the stove she owned because the oven element was not functioning for over a year & it was beyond repair. We bought her a new stove $427, she cried.

Another (14 year tenant we inherited) was paying extremely high heating & summer electric bills so we installed a new hi eff fce & threw in central air, so she could get rid of the old window units she owned.

The big old fce was a safety hazard & was definitely going to fail. My wife did have a chuckle when the tenant put in an extra $25/month in the rent to 'pay for the central air'.

You can never  go wrong 'paying forward' ....

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