Should I raise the rent on a good tenant well below market ?

Question

Hi,

I have a 3bed 1bath single family house which is rented at $1,400 a month. Current comps in the area are around $2,000- $2500 month and should be able to easily get that.

My current tenants have been there almost 10 years now and always pay on time. They are usually several days or even 1 week early paying the rent. They are great tenants and rarely ever have a maintenance call and small stuff they just take care of on there own and don't charge me or even let me know. I already went a couple years without even talking to them.

I have been slowly rising the rent like $50 a month every year but its still way under market value by at least $500 - $1000 a month.

It is a old house and does have its flaws which is expected in a 100+ year old home.

What would you do or how much should I raise it at renewal? Its a yearly auto renew lease.

Thanks

Jon K. · Answer

They know they're renting at a discount and larger increases won't drive them away because the alternative is them paying market rent elsewhere after the expenses of moving. Move them up as much as possible each year until you're back to market rent without driving them away by jumping too much at once. That last part is subjective and there's no perfect answer but if you're truly under market by 500 to 1000/month maybe try $250/yr so that you're back on track in two years.

It's easy enough to explain the need to increase as well: everything on the planet is more expensive right now. That includes property taxes, insurance, the cost of maintenance and labor etc. By not increasing rent enough each year you're losing money (this is the truth).

If they push back hard or say they're leaving, you can always negotiate and back it off a little. I'd rather have a known good long-term tenant renting at a discount (but not a $500-1k discount) than fill a vacancy with an unknown entity.

John Reagan Johnson · Answer

Vacancy time is the biggest financial pitfall that comes with owning a rental property. If tenant has been great and you have had no issue, I would be hesitant to drastically increase the rental rate. Now this is a business at the end of the day, so you have to do what makes sense for your goals concerning the property. You just do not want to lose a historically good tenant, and then have to eat the costs of marketing/leasing the property again. May be worth showing them the current market comparisons, and meeting in the middle for a compromise.

Sam Kahl · Answer

Conventional wisdom is that keeping great tenants at a discount is better than not, however, being under by $600-$1,000 is a LOT. Is the house in an area where you would expect new tenants to be of similar quality to your current ones? Is the house paid or is there some mortgage left?

Paul De Luca · Answer

@Jimmy S.

You're missing out on $600-$1100/mo in rent which translates to $7200 - $13,200 per year.

I understand you have a good long term tenant, but that is a lot of money being left on the table.

This may sound harsh, but your tenant is replaceable. You can definitely find another good tenant at $2000-$2500/mo rent. Tenants and landlords are only loyal to each other until a better deal comes along.

I would just be transparent and say the rent is very below market (provide comps as evidence) so there needs to be a big rent increase. If they can't afford that, then let their lease expire, fix the place up as needed, and get it rented.

Cole Strange · Answer

You could run a report with rentometer.com pretty quick and easy. Email the PDF or print. I suspect you probably have some guilt with this. I would too. Show them the market objectively and then measure a comfortable number below market. Giving them a long runway is a nice way to handle this too so they have time to make a move if they'd like to. Hide behind inflation. It's for real, you're not embellishing. I'd probably consider that expensive electric bill though. If they're paying 600-800 in utility cost your unit might not actually be all that under market like you thought. What's the heat source? Baseboard electric heaters?

Jimmy S. · Answer

thanks everyone of the replies.

As far as the rent goes, how do you show your tenants the comps and see what they think the raise of the rent should be?Do you call them and ask to stop over and visit and show them or do you just send them a letter with the info and tell them to fill in a figure which they think is fair?

Aaron J Smith · Answer

These are always tough decisions to make and I appreciate all the thoughtful responses here.  You never want to lose 'good' tenants, but 'good' tenants, by definition, should pay the going rate for the area...or at least very close to it.  I think this decision comes down to three things:

Risk - What's the risk that doing a more rapid pace of increase would drive your tenants away?

Relationship - Is your relationship with the tenants strong enough to navigate through the discussion of raising rents faster to get closer to market rates?  Do you know their financial situation and whether they can afford the increase without financial hardship?

Replacement - If they leave, can you replace these tenants with similar ones willing to pay market rates within a couple months?

Based on your numbers above, if you could even generate $2,000 vs $1,400 ($600 different) you could afford to have your property sit empty for couple months and break even at about 7 months or so.  $1,400 x 7 months =$9,800.00 or $2,000 x 5 months = $10,000.00.  Then, everything after that is additional revenue.

Good luck to you as you navigate this challenge.

Pedro Andrade · Answer

Hi Jimmy.

This is a great situation to be in—reliable long-term tenants are valuable, especially ones who take care of minor maintenance themselves. While you're well below market, a drastic rent increase could risk turnover, which comes with vacancy costs, leasing fees, and potential tenant quality issues.

One approach is a phased increase: Instead of jumping to market rate all at once, consider a structured increase over 2-3 years (e.g., $150–$250 per year). Pair it with a value proposition—explain that costs have risen but you appreciate their tenancy and want to keep it fair for both parties.

You might also explore a “preferred tenant rate,” which is still below market but makes sense financially for you. If they leave, you can then reset to full market rate.

Have you spoken to them about it yet? A conversation could give you insight into how flexible they are.

Mackaylee Beach · Answer

Being below market rent is definitely not ideal. By sharing comparable rates with your tenants, you can help them realize that they are paying less than the market value.This transparency not only fosters trust but also encourages tenants to appreciate the value of their current living situation. It opens up a dialogue about potential adjustments or improvements that could benefit both parties, creating a more harmonious landlord-tenant relationship. Additionally, understanding the local rental market can empower tenants to make informed decisions about their future housing options, whether they choose to stay or explore new opportunities.

David Greenberg · Answer

Check out BP podcast episode #1085 from Feb 19th. The guest Dion McNeeley discusses his "Binder Method" of raising under market rates that's pretty novel and actually makes a ton of sense. In a nut shell: he collects comps/regional data in a binder and shows it to the tenant proving that their rate is undermarket and that they will pay more if they go elsewhere. He then asks them what a fair amount would be to raise the rent. Sound like he often accepts their suggestion or even LOWERS it by a small amount. His goal is to raise the rent but to also keep a good rent-paying long-term resident in place. It's not about squeezing every last penny out of someone.

I believe he may follow this with some type of ~5% raise every 2 years.

Might check it out and see if it makes sense to you and your management style/goals.

Should I raise the rent on a good tenant well below market ?

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