Risk tenants moving out or take a lower rent?

Question

Hi BP folks,

Looking for some advice here. I acquired a duplex (one 2Bd/1ba, one 3Bd/1ba) in the Holly Hill / Hilltop area near West Frankin Elementary school in April 2021. It came with good long-term tenants who have been paying on time and have not caused any issues.

For reasons I myself do not know, the topic of increasing their rents never came up between my property manager and me. The 2Bd/1ba tenant is paying $625 (+water bill) and the 3Bd/1ba tenant is paying $700 (+water bill). The market rent is $900 & $1100 respectively.

I have the choice of:

1) Being conservative in bumping up the rent (PM recommended $675 & $750). This comes with a comparatively lesser likelihood of tenants moving out and gives me $1425 * 12 = $17100 annually.

Or

2) Pushing an aggressive rent increase ($800+ & $1000+) and risk tenants moving out. Replacing tenants would mean ~$7000 costs (1 month of lease fees ~$2000 and turn costs ~2500 per unit), but assuming I am able to find tenants at market rate then I'll get 2000 * 12 = $24000 annually.

I'm inclined to go with #2. I figure 1) it'll take approximately a year to recover the $7000 turn costs 2) with option #1, it's going to take me years to get the rents up to market rate.

Is the rental market in that area conducive for this aggressive approach, or would you recommend caution? Am I missing something in the equation here?

Bill B. · Answer

If you’re truly 10% under “market rent” where can they go? Unless they literally can’t afford it, you’re saying they would move to a new place with all the costs and hassles invoked to pay a stranger $100/mo more than staying put?

in todays political environment you just can’t find yourself 20 % 33% under market rent. What if during the  next year of their lease a 5% rent cap is instated by the local government?  In 6 years you could charge $1,000/mo. You know, when market is $1300 plus. Your monthly losses are forever. . If you’re right about market rent (hopefully those numbers came from PM, it is their job. Though they are then making you operate as a charity for charging less.) they should stay. If they don’t you are now interviewing a more affluent clientele.good luck.

Bob Stevens · Answer

So you are going to evict vs getting a couple hundred more ,big mistake. You will now have about 10k to make up, then what if the new tenants leave in a year, then more money to get it rent ready again. What if they decide not to leave , now you have to evivt. You are making much more work and stress for no reason. You are being provided with very poor advice

You need to hire a PM co and stay out of their way.  There is no such thing as a "rent cap "

BTW I have done 1ks of move in and outs and 100s and 100s of deal out there, so I know a thing or two

All the best

Alan Asriants · Answer

Is it hard to get your unit rented in your area?

If so, increase their rent, but conservatively.

If not, increase to market rent. Also factor in condition of the unit and what you would need to do to get it to market rent

Analyze your market, figure out how long vacancies last, and the amount you would need to renovate or refreshen the place.

I had a tenant who was paying 800/m but apartment in their condition would rent for 1200/m. It was super easy for me to rent them out. If i put work into it, I could get 1600/m.

i bumped them up to 1200/m. They didn't move out, because there were no other options.

Bill B. · Answer

Yes. VERY poor advice. By the person that didn’t read your post where you said you already had a PM. Or that thinks there’s no such thing as a rent cap, like he’s never heard of New York or California. Someone that thinks increasing rent from $1325 to $2000/mo ($8,100/yr) just isn’t worth it. When you have that kind of money you can follow that kind of advice.

Hopefully it’s their own properties’ income they’re screwing up and not unsuspecting customers’.

Ned J. · Answer

I'd shoot for staying about 5-8% below market.....and be honest what the true market rent is for your unit in its current condition. You cant say your "hasnt been touched in 10 years" unit is the same as a newly renovated unit....so be realistic on what yours really is compared to what they could get for the same price.

Turnover costs $$....you dont want to induce a turn over unless you can recoup that cost really fast. But you have to keep right on the heals of market rent with regular increases, but not enough that people are better off leaving.

Salil J. · Answer

The tenants have been around for some years now, so I believe painting is going to be on the menu. Flooring, I don’t think. As you can guess, I’ve not sorted out those details yet - will go through that if the tenants decide to move out.

Theresa Harris · Answer

I'd check with other PM. I know for some 1 months' rent is common (not where I am), but that should include showing the place and everything. What else are they doing for the additional $2-2.5K?  Are the places in rough shape and need new painting, flooring, etc?

Melanie Thomas · Answer

#2 all the way! Good luck & happy investing!

Salil J. · Answer

Thank you all, for the insights. I'm moving forward with option #2. I'm especially concerned about getting stuck in a rent-cap nightmare that @Bill Brandt pointed out.

@Bill Brandt: Yes, those rent numbers came from my PM.

@Theresa Harris - My PM quoted me a $2000-$2500 turn cost to get each unit rent-ready. And the lease fee is 1 month's rent ($2000).

@Nathan Gesner Thanks for your input, definitely food for thought.

@Alan Asriants I was told it's not hard to get units rented in the area, if priced right.

@Bob Stevens I hear you, but I'm going to take the risk instead of getting caught in potential rent-cap nightmare. Not that I am aware of any such developments happening specifically in Ohio/Columbus.

Bob Stevens · Answer

Low rent, bump it a little, NO you do not want them to leave then it wil cost you 7ksih for the rental turn, Its ALL about the math

Good luck

Risk tenants moving out or take a lower rent?

Most Popular Reply