Raising Rent On Good Long Term Tenants (cost vs. benefit)

Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes

5y

You “have” to raise it $50, nobody moves over $50. You’re talking about 5% over 4+ years, defiantly a losing proposition. Would that $50 even cover 4 years of insurance and property tax gains? You should raise it $100-$150 minimum.

It SEEMS like you’d be better off getting an 8% property manager who can get at least $1250. You’d net $1150/mo after fees and not have to do any work. So anything less than $1150/mo and you’re not working for free, you’re paying to work. (I just raised rents from $2700 to $2995 and from $1395 to $1850 on long term tenants who quickly renewed.)

Hopefully they didn’t really do $3-$5k in damage in 3 years or you probably want them out anyway. With a PM I’m usually under $2k out of pocket on 4-6 year tenants.

2 Reply

Christopher Busch

New to Real Estate · Sneads Ferry, NC · Member since 2020 · 21 posts · 8 votes

5y

Personally I’d rather keep my tenants happy and leave it for the unmodulated future if the numbers make sense. My tenants are awesome and I want them to stay the entirety of the loan

2 Reply

Christopher Busch

New to Real Estate · Sneads Ferry, NC · Member since 2020 · 21 posts · 8 votes

5y

Maybe I’d consider raising in another year or so

0 Reply

Scott M.

Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes

5y

If you haven't done an inspection I would do an inspection. While they are low in maintenance you need to see how well (or not) they are taking care of the place. I would not sign a new lease w/o doing that.

By the sounds of it they are great tenants and if they are taking good care of the home I would still give the rent a bit of a raise but also have a conversation with them about it. Trying to go for market rent isn't the right play for me but I would give it a $50 bump or so as @Bill B. said.

Nothing wrong with having the conversation and see how it goes then make decisions after both a conversation and inspection.

Also, well done on the analysis. Love that you put that kind of effort and thinking into it. Playing out all the possibilities. Well done!

2 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

5y

I understand not being at the top of the market but I don't understand the camp of renting to good residents at 80% of market rents when it's just as easy to rent to good residents at market rates. If they leave, you will make up the turnover costs in one short year. At a minimum, raise the rents $50 per year until you get somewhere near market. Good luck. I suspect your resident is not going anywhere as there is nowhere else to go and get subsidized housing.

4 Reply

Jill F.

Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes

5y

I'd raise it 30-35. 3-3.5%

0 Reply

Theresa HarrisPro Member

Member since 2019 · 15k+ posts · 11k+ votes

5y

Check if there are caps on how much you can raise the rent. There is something to be said for renewing it every year, even if it is a small amount. I'm sure your expenses have gone up over the last 3 years, so raise it a bit.

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

5y

Originally posted by @CJ B.:

Greetings BP'ers.

I'd like to get some opinions on this, to see what other landlords might do in this situation/current environment etc.

I have a:

Self-managed, out-of-state, fully paid off rental.

Area Market Rents Avg. $1200 / mo. for similar units.

Tenant's current is $950/mo. (Market was $925 when they moved in).

Been in place for 3 years.

Never late on rent, fairly low maintenance.

Yes, I could raise rent to market. But, at what cost?

Tenant's job/wage hasn't changed as far as I know.
Aftershocks of pandemic still linger in this area
Turnover out-of pocket costs 3-5K while it sits vacant (fortunately never sits long +next to some desirable amenities.
Take time to advertise / arrange showings / find qualified tenants.
I'm out of state / self-managed with one contractor to look over things when needed (who is quite in demand).

What things do you consider when raising rent?

What would you do in my shoes---Raise to market & take a chance of late rent, missed payments, move out?

or renew lease with no changes?

Looking forward to your responses!

THANKS!!!!

I have zero issue having our best tenants pay a little less than market rent. From my perspective they save me the turn over cost/effort (and risk associated with a new tenant) and they get to save a little rent and will be very challenged to find a similar unit at the same price or less. So-so tenants I keep the rent market rates. Poor tenants I charge over market rent and get them to give notice of termination at the end of the lease. I also try to not shell shock our best tenants with large increases.

You likely have a good tenant. The issue is you are $250 below market on a fairly low rent (I have units $250 below market but rents around 3 times higher). I would raise the rent $100. The tenant would still be $150 below market and not be able to move without paying more. I would not raise more than the $100 because more would likely be too much for the tenant as $100 is already more than 10%.

Some of our good tenants will be getting $300 rent increases, but less than 10% increase and they will still be paying less than market rent (2020 rents were flattish for the first time in a decade, but 2021 rent increases are insane in my market).

Good tenants are worth keeping. Turn over expenses add up and take effort. Most PMs charge 0.5 to 1 month rent for placing a new tenant. There is also the unit turn over costs and the vacancy. Good tenants that stay long term easily save the LL enough money to justify a slightly lower rent.

Good luck

0 Reply

Will GastonPro Member

Rental Property Investor · Columbia, SC · Member since 2010 · 1k+ posts · 2k+ votes

5y

I like to ask myself this:

"What seems like the highest number I could raise the rent and they won't move over it?"

Nobody moves over $20/month. Not raising rent every year, at least a few dollars, will eventually be a pretty big disservice to you and your investments.

3 Reply

Michael K GallagherBusiness Member

Real Estate Agent · Columbus OH · Member since 2018 · 1k+ posts · 1k+ votes

5y

@CJ B. I think this tactic was stollen directly from a podcast guest. But I really liked it. The guest essentially said they sit down with the tenant ( or call) and show them comps for rent in the area. And then ask them “now what do you think is fair”? The idea being they will see that if they move it’s much more expensive so maybe there is a point in the middle the tenant would be happy to stay but is still higher than current.

I liked it because of the communication aspect and making the tenant part of the decision.

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Joe SplitrockPro Member

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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

5y

How much have your costs increased over the last 3 years? I have trouble believing that your property taxes and insurance have not gone up. My point is doing nothing means you are going backwards. At a bare minimum you should be increasing to cover your increased costs.

The bigger problem here is CAPEX which is the silent killer of cash flow. Even if the tenant is low maintenance, CAPEX is occurring every day. What I mean by that is everything in that house is slowly wearing out. Water heater, roof, HVAC, paint, flooring, siding, windows, etc. The reason people forget about CAPEX is it happens in large chunks, so you don't see it. The harder part about CAPEX is future cost is always higher. When you rented to that tenant three years ago, a water heater may have costed $900 to replace and today it is $1100 (example only). Lets say a water heater lasts 10 years. The "per year" cost of a water 3 years ago was $90 and today it is $110. If you are charging rent rates from three years ago, you are not capturing current value of CAPEX on the property.

I fully agree with your comments that turn over has an expense and there is value there. If market rent is $1200 and they are paying $950, nothing says you need to raise it $250. You could raise it $50 or $100. If market rate is truly $1200, that means their other options in the market are more expensive too.

If they area good tenant, I would offer them a year renewal with two options. Tell them they can lock in a year least at $1025 or they can go month-to-month at $1150. Just explain to them that costs have increased for you and market rents are at $1200, so you are giving them a "good tenant discount".

Whatever you do, just be aware that "not raising rent" means you are reducing your net income every year. Don't be scared of vacancy. As hard and costly as it is to fill a vacancy, it is equally hard and expensive for your tenant to move.

2 Reply

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

5y

Thoughts:

1. Market rate is an unknowable number until the unit is actually on the market and you see what someone else is willing to pay for it. You can get a reasonable market range based on similar properties. I try to use the most conservative of these numbers when I am making this judgement - too often I see people thinking "market rate" is the very highest price they've seen another place go for, or even something like this: "Well, that place rented for $1000 and it doesn't even have an icemaker, my icemaker makes this place worth at least $1500" - facetious but you get my point.

2. As @Joe Splitrock mentioned, you need to be collecting enough money to account for the parts of the house that are wearing out but not costing you direct money every month - the roof; the water heater; the HVAC; the flooring; ETC. OR you need to have a plan to divest yourself of the property when you reach the point where major CAPEX is coming down the line, which is what a lot of investors will do. So keeping the rent artificially low is not helpful financially in the long run.

3. On the other hand, it depends on how hard you want to work. There's no rule that says anything must cost $X, and anyone that tells you so is full of themselves. Products - and your rental is a product - are priced based on all kinds of factors, including scarcity, business objectives, long-term strategies, etc. For example, Wal-Mart is quite adept at pricing products at or below cost when they come into a new market to essentially sink the competition, then bringing prices back up to profitability. Or they'll price certain products at a loss *all the time* to get customers in the store to buy additional items. Pricing your property below market doesn't mean you are stupid, it means you will potentially bring in less money than might be possible under optimal conditions. *Usually* those optimal conditions means you work harder for that money - the unit turns over more often; you have to make it nicer inside; you deal with more demanding tenants; ETC.

I am a lazy landlord (though a hard-working machine in general ;) ) because I have another full-time job already and several side items going all the time. I don't want owning rentals to be any harder than it has to be, so I frequently let tenants skate by on small or no increases, depending on my own factors. One of them is "how much of a pain in the *** is this tenant, and how well do they maintain my property?" A tenant that is Johnny-on-the-spot with keeping up my property, pays on-time every time all the time, and virtually never calls, is worth something to me, and I'm willing to trade some dollars for that tenant. Nobody is going to tell me it's right or wrong, because it's my business and I will run it as I see fit. My general MO is to reset to "market range" whenever a tenant leaves. I run a pretty decent-sized SFH portfolio on autopilot almost as good as can be done, and I'm happy with it that way.

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2 Reply

Kimberly Carver

Member since 2020 · 119 posts · 56 votes

5y

@JD Martin I love this take on it!

1 Reply

Colleen F.Pro Member

Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes

5y

@CJ B. The only question is how much do you raise it? People get raises at work. your costs have gone up. No one moves over a $20 increase unless they were moving anyway. I would raise it at least to $1000 if you are sure market of a similar condition unit is $1200, how much beyond that you go is up to you.

0 Reply

Greg M.

Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes

5y

Tenant's wage is not your concern. Does the cashier charge you less for your groceries because your wages haven't kept up with inflation?

You're 26% under market. That is not acceptable in any way no matter how great the tenants are. Unfortunately, you've allowed it to get so far under market that you put yourself in a hard position. It's probably best to raise to $1150 right now. If they leave, you rent at $1200, if they stay, they have an under-market place and you've cut your losses.

0 Reply

Leroy Norris

Member since 2020 · 15 posts · 13 votes

5y

@CJ B.

I’m in this exact situation right now, have a tenant no longer on the Section 8 program… when she moved in she was so I agreed to pay water, because they gave me more… so I haven’t raised rent in 4 years. I’m giving her a letter next month with a 6 month notice, she’s month to month, GREAT TENANT, I just didn’t want to hit her before the holidays, that unfortunately I have to increase rent about $200… see we’re it goes like someone said ever with my $200 increase it’s still cheaper than anywhere else she could find

0 Reply

Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

5y

You're losing about 25% every year.

Even with the very best tenant, I try to keep rents within 10% of market. You've got to give them notice and rip the band-aid. Doing it in increments is more likely to cause confusion and animosity, and they may eventually get priced out in the end. Just hit them with a big increase and see if they can absorb it. If not, give them a little extra time (60 days max) to find something new and then get a renter that will pay you what it's worth.

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0 Reply

Jennifer Donley

Rental Property Investor · Saint Louis, MO · Member since 2018 · 228 posts · 279 votes

5y

Oh there are always so many opinions on on this.

The best landlords I know have a renewal process that includes annual reasonable rent increases. Usually $25 to $50 a a month depending on the current rent and market rent. I find that tenants have no problem with this.

The suggestion to ask the tenants is a good one, especially for landlords who don't have a set process and are uncomfortable asking for increases. I have recommended this to others and it almost always works well.

And it's funny - everything I pay for right now is going up, including on my rentals (insurance, taxes, maintenance, labor, supplies and materials, etc.) - not one time has any of these vendors, municipalities or insurance companies called to ask me how I'm doing, if I'm making more and how I feel about an increase before they do it. They just increase the bill and expect me to pay it! So I don't know why our tenants would expect something different from their housing provider.

0 Reply

Jeffrey Donis

Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes

5y

@CJ B. I'd raise it slowly overtime. Subtle increases will be more considerate of the tenants, but if you can still get quality tenants at market rent, then your best option is to raise rents to the market premium and give the tenants the option to stay or leave.

0 Reply

Shefali Trivedi

Member since 2021 · 16 posts · 6 votes

5y

I would recommend raising the rent by $25-$50 - its more a matter of expectations than the dollar amount itself - you don't want the tenants taking you for granted especially since you have not raised the rent in 3 years.

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Raising Rent On Good Long Term Tenants (cost vs. benefit)

Raising Rent On Good Long Term Tenants (cost vs. benefit)

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