How much can you raise the rent at one time

Question

Hi everyone, This is officially my first post on Bigger Pockets though I have been following all the site quietly for a few weeks.

I own a SFH which has had the same tenant since May 2011.  When he moved in, the rent was at market, maybe on the low side, though I have not raised rents. Since this time, rents in the neighbourhood have gone through the roof and from my initial market research, if I was renting today, I could probably get an extra $500 per month which a 25% increase. If I raise the rent too much, I will have to hire a property manager to find a new tenant and manage as I am overseas.

He is a good tenant, takes good care of the place and pays his rent on time. So what is a reasonable amount to raise the rent in such a case, so I can increase my cash flow, but not lose the tenant.

You advice is greatly appreciated.

Julie Macd · Answer

Thanks @Radhika

I checked with my Real Estate broker who confirmed I only need to give 30 days notice for up to 10% increase in one year. Anything over that and you need 90 days notice.

I am thinking now that I raise the rent 10%, refinance to get the cash out and buy another property.

Radhika M. · Answer

@Julie Macd Check your state and city laws if there is any limit on increase. If you are in a rent control area there will be max you can increase. If you are not in a rent control area I would increase 10% .  The tenant must know they are paying way below market and could be one of the reason they decided to stay two years ago.

For long term tenants I am okay with them being 10% below market but 500 dollars and 25% below is a lot. Even if you got a property management and pay 10% to them you would still come out ahead if you got market rent.

Julie Macd · Answer

Thanks for your input.

Currently, the tenant is on a month to month lease, as he was supposed to move 2 years ago then he decided to stay. He rented the apartment during the financial crisis. I do not see the market really going down to what he is paying now, but may not stay at the unrealistic rates of today. However, I want to keep the increase reasonable.

I will talk to him when I am in Seattle this summer and plan to increase the rent $100 a month (6.5%). Still below market but will provide a bit more cash flow. At the same time, I will get him to sign a new lease.

On the other hand, as I am reviewing my financial goals and positions, just breaking even on the property also is not a good return on investment, relying solely on appreciation. The other option I am looking into is if I should sell the townhouse to take the cash out (while the market is hot) and invest in a multifamily (in which case, I would not want to sign a new lease).

In any case, if I increase my holdings beyond the one, or if the tenant moves out I will need to find a property manager. (I got very lucky I realize with my first tenant).

Travis Lloyd · Answer

Hold on, you're overseas, "self-managing" a SFH rental that is taking in a rent that you're happy with. Then the market in the area goes up and you want to raise it? Lets look at it this way: when the market drops, are you going to lower the rent to your then-current tenant? If you have found a tenant who pays on time AND takes good care of the place - all while you are out of the country, I would say stop looking at the 'other side of the fence'.

Lets say you hire a management company, and they charge their monthly fee, plus they are going to charge you 1 month's rent commission for finding a new tenant. Calculate how many months at the new rent it would take to break even given the monthly fee plus the commission? Then add in a vacancy rate - because you don't know the new tenant and how reliable they will be (maybe that is half a month's rent? One month?). Then subtract some touch up painting and minor repairs that the maintenance company is going to insist you do in order to get that market rent.

By the time you break even - rents could drop. Your fancy new high-paying tenant leaves to get a better deal, and you're back looking for a tenant at the old rate. Some things are worth gambling on, but you can't put a price on a good tenant who takes the stress off of you while you're not even in the same state, let alone the same country.

Just my 2 cents.

Bill Gulley · Answer

The tenant must know he has a deal when you raise the rents.

This can be state specific as to legal increases and there is also an issue of pricing a tenant out that is in a renewal situation as it can be seen as an eviction.

10% is about the accepted cap if not stipulated by law, but then comes the question as to affordability and the tenant willing to stay. It can take a long time to bring rents back up to market if you don't stay on top of it.

The only other excuse to hit a tenant up with excessive increases is if you significantly improved the property, even then you may be limited to increases on renewals.

A new tenant is not an issue.

If you want to keep this guy, increases of 3 to 5% would be acceptable pointing out the market still being much higher. $500 in rents going to $550 can be a chunk for a tenant in that price range, rents at $2000 a month may not be as bad to someone hitting them at $2200, so long as they can see they are still below market rents.

If I were in your shoes I'd call my tenant and reach an acceptable solution, saying you don't want to lose them but that things have gone up and you're losing money.....negotiate!

Also, be sure to give the proper notices required, sticking a tenant with a much higher rent increase on the day to renew can mean problems. Your lease should have automatic renewal limits depending on your local economy and market. Good luck :)

Kevin Harrison · Answer

Since it sounds like you manage this your self I would wait until his lease is up and give him a heads up that you are planning to raise the rent. I think $100 dollars a month would be a safe bet if rents have sky rocketed around you as you say. I would not try to jump to FMV though, if you want to keep this tenant. Although it might be worth paying a property manager to find you another tenant if it will net you another $500 a month.