How soon to increase rents on MTM tenants?

Question

Hi All,

curious for your perspective. On a new C class multi-family building I have, there are a few tenants that are on Month to Month leases, than I plan to renew to long term leases (if they want to as well). The current rents are well below market (ie $500 for a 1bd vs market of $900-$1000). My Property Manager suggested waiting a few months before pushing for a new lease with increased rents, but how long should I wait?

also, any tips on getting rents up? Anyone had recent luck with the "book binder method"? Thanks!

Drew Sygit · Answer

@Tim W. a lot of great advice already!

Some additional thoughts:

1) How well have you investigated the comparables that support the $900 rent?- Owners often make the mistake of using the highest comparables - when their units do NOT offer the same amenities, finishes and location perks.

2) You PMC may be right in suggesting to wait for the following reasons:- Some tenants always seem to leave after ownership change- Some tenant want to see how good the new management is before deciding to stay or go- We're heading into winter, the WORST season to replace tenants! Only make sense to replace them now if you plan major renovations with the goal to market them by March.

3) You want to control your cashflow hits! If you come in heavy-handed you will scare most your tenants and they will commit to leaving w/o telling you. Class C tenants do NOT care about breaking their lease when they really want to move. Better to have a plan to slowly raise rents as tenants move on their own or have the reserves to handle mass vacancies and redo all the units at once.

4) Nothing stopping you from raising the rents 5-10% right now and seeing how many tenants move on their own.

Evan Polaski · Answer

@Tim W., you have your answers, so I am only echoing at this point.

You are effectively doubling their rent, I would bet $100 that none of them stay with that big of a bump.  So, you might as well get it over with, because they are not going to accept your new terms.

That being said, there are a few things to think about:1. I don't know how big your building is, but I would consider if you want several vacancies at once.  If not, notify one tenant at a time, and then wait to notify the next once your have filled the first vacancy created.

2. I am assuming these units are going to need fairly significant renovation to be brought to market rates, so you need to understand your cash position.  If each unit needs 10-15k invested to actually get $900/mo, do you have "a few" x $10-15k to dump into renovations right away?

3. How confident are you in $900/mo?  Not to say $500/mo isn't well below market, but I also see a lot of people trying to push rents far further than what the market will really support.  What is the market perception of your property and the area?  What is the income of the people that live in that area?  What kind of jobs?  etc.

I find a lot of times, myself included, owners and PMs say the market rent is X, but when they try to market the unit for rent at that price, no one is willing to pay that rent for that unit, in that condition, on that road, with those amenities...  I don't know your property, so maybe you will fill it all day long at $900, but that is one big reason why I say you should do one at a time and see how the market responds.

Robert Rixer · Answer

Not sure how waiting would help. Give as much notice as possible, sure. But just waiting to do the exact same thing 3 months from now doesn't make sense. The tenants likely know they are getting a great deal and the party won't go on forever.

Adam Bartomeo · Answer

When we take over properties with low rents we normal raise 1 - 2 at a time. It depends on how many total units there are. We do this to reduce the amount of turn over at one time. We start raising one - two months after taking over. We do this because some tenants will naturally leave when there is a new owner and PM. If the rents are very low you will have higher turnover. If you are at market rent than you won't have much turn over.

Caleb Brown · Answer

If they are that far under market I would bump it to closer to market, they can stay or leave. It will be hard to make up a $400-$500 difference if you do slight increases. On top of that the rents will continue to go up in the area so you'll always fall under market. Some people would rather keep good long term tenants but they are way under so I don't think that makes any sense. Pull the band-aid and do it