How Do YOU Raise Rents?
One thing I have learned when interviewing many local REIs over the last year (which was part of my research when deciding whether or not to get into this crazy business) is that more than 60% of them have not increased their rents in the last two years.
One of my primary investing goals will be to find income properties with depressed rents (for whatever reason) and raise them to the maximum that the market will bear. This is important to me not only to keep up with rising expenses and inflation, but also to improve cash flow and boost the market value of the property.
I am approaching the closing on my first property. It is a 4-unit apt. building where two of the four units are rented on a month-to-month basis, another is in the middle of a lease, each for $600/month, and the fourth is vacant.
What is the most tried-and-true method of finding the maximum rents that the market will bear? How would YOU approach the existing month-to-month renters about raising the rents? Should I get them to sign a new lease immediately?
For some reason, many of the landlords I've spoken with rank raising rents on their tenants just above fixing toilets on the list of their least favorite things about owning properties.
I'm hoping for a lively discussion that might help us all raise our rents to boost our cash flow and boost our property values. All suggestions are greatly appreciated! 
We recently closed on a duplex that was rented out below Market and know how you feel. We had to come in and raise the rents from 600-850 just to make the deal work. We did it knowing that the renters would probably run, at first they didnt but now one (who had lived in the place 15 years) is moving and we will have to find new renters. No big deal to me because I am raising the rent before I find someone...There are regulations about how much notice and everything so as soon as you close get it to them in writing. We had to prorate the jump and this gave them one month where it was a partial increase......the bummer is you come in looking like the bad guy while the guy that created the situation (former owner) comes out smelling like roses....In my opinion the rents should have been raised to keep up with the market and since he didnt he was able to make up for it in Market Price....to make it work we HAD to raise.....Meet with the tenants asap to let them know and give them time to think about it.....if it is a big jump they will probably go looking...if it is like my case they WILL NOT like what they see.....the tenants we lost had to move into a much smaller place to afford it.......again it sounds cold but thats not your problem...be fair and they will see.....We also came in and started fixing things up which helped a little......when I told them one asked well what are we going to get for the extra rent......I am putting in new carpet and doing things so they feel like they are getting something...................B[ Edited by BMan on Date 01/27/2004 ]
Nice to meet you look2thehorizon,
One of the main reason why the landlord don't increase the rent (every year) is to keep the current renters in place, once they are happy with those they have.
Your goal is to lock the renters into minimum 1 year lease. As far as the existing month to month renter, check if the previous landlord have the old lease so you can see who are you dealing with. And if he doesn't ask the renter to sign the new 1 year lease or move.
Raising the rent $100 a month gives you an extra $1200 per year.
Advertising in local newspaper for 2 weeks - $180. Six weeks of vacancy - $750. Turning on power for showing - $50. Fixing minor cosmetic problems - $60. Personal time spent putting up signs, printing flyers, putting on a lockbox, answering the phone, checking on references - priceless.
Brenda
Nice to meet you Brenda,
Yust wonder: Didn't you hear that Master Card ad you just mimicked towards the end, one to many times?
Reisng rent $100 a month in some markets migh mean you just managed to empty up the building but the formula s you described is about right. Another option, let the property management company do the walk and talk and you keep your price less time.
Cheers,
Alex
Brenda,
Are you implying that we are better off NOT raising rents because the immediate costs of losing a tenant are not worth it?
If we are investing for the long hall, isn't a short term expense worth the long term income that raised rents provides?
[addsig]
From what I can tell he is saying that raising the rents $100 is not worth losing a tenant that has been there for 15 years(or what have you in your situation)... Is an extra $100 worth the risk of higher vacancies? If you are slightly below what the market high is you will bring in more long term tenants I would imagine. Also why did the landlord let them go month-to-month, there would have to be a reason that he did not want the long-term lease. How long has the leased tenant been there?
Quote:
On 2004-01-28 15:37, look2thehorizon wrote:
Brenda,
Are you implying that we are better off NOT raising rents because the immediate costs of losing a tenant are not worth it?
If we are investing for the long hall, isn't a short term expense worth the long term income that raised rents provides?
As has been said, as you increase rents you will incure vacancies and turnover costs. Here are a couple of thoughts...
Raise one unit at a time. If they do turnover, you'll only have one at a time.
Raise them little by little. Get them accostomed to the changes, and increase it again.
You can increase income by either increasing income or decreasing expenses. You may be able to pass on other utilities to the tenants rather than raise rents immediatly.
Talk to the tenants beforehand. Explain to them that they've been extremly fortunate to have low rent for such a long time. Show them what market rents are for the same places, and then put their rent $15 bucks below that so that you keep them in place, if possible (and if you like them and want them to stay).
Start advertising that you've got an apt. for rent the same time you give them notice (30 days prior).
Finally, I understand what you're saying and why you say it. That said, once you get into that situation, it's not that easy. You may feel sorry for them, you may like them; Perhaps they've been there for 15 years, never complain, pay on time, and will most likely be there another 15. If they move you'll have to paint, recarpet, make a number of updates, repairs, change out appliances, etc. It may not be practical to make a large rental increase so that they move.
Oops, forgot this one.
I imagine that you've done your research in only your own area. In order to compare apples to apples, you need to find out how much the property has appreciated in the last 2 years. If you're in a flat or deflating market (be it temporary or otherwise), then there's a good chance that market rents haven't increased at all in the last 2 years. It may be that their rents are still at a fair market rent price, even without raises in 2 years.
I notice that you're in Ohio. Around the country, the trend right now is that the coastal states are experiencing appreciation in their RE markets while the land-locked states are having a tendancy of being in flat and deflating markets (Phoenix and Vegas being the obvious exceptions).
If this is the case, it may be a great time to buy, as your RE market is probably soft with lower prices for RE and it will become more bullish in the coming years. [ Edited by hibby76 on Date 01/28/2004 ]
Just pointing out that there is a cost to raising the rents that you need to factor in so that you can make a sound decision.
I would certainly be willing to take less rent if I had a tenant that paid, kept the place up, and did not call me with problems.
Brenda
The current tenants renting month-to-month are doing so because they completed a one-year lease with the previous owner about two years ago. They have both paid pretty much on time for at least three straight years (according to the previous owner’s rent roll.) so I would like to keep them as tenants. I feel like I should have them sign a new one year lease with me to protect my and their interests. What do you think? Please comment…
I plan to give discounts (like a coupon for $25 off one month’s rent) for paying on time for 6 months straight, and maybe a choice of a free microwave, DVD player, or a “Rainy Day $100 Rent Discount Coupon” for 1 year of consecutive on-time payments.
I do not plan to raise the rents by $100 a month. I'm not sure where that number came from??? I only want to increase it annually just above the rate of inflation to keep up with expenses. The building is in a very desirable residential neighborhood where property values have appreciated an average of 5-6% over the last three years. I cannot imagine that an increase from $600 to $615 (or 2.5%) would chase any of the current tenants away.
Thanks for all of your comments. Please keep the replies coming, this is great!!!
[addsig]
The easiest way to tell a tenant that you are raising rents is simply to tell them directly. Everyone understands that expenses go up. If you simply raise them gradually as you mention you shouldn't have any major complaints. I do have to question your desire to get the maximum rents for your units though. Like all things, there is a difference between maximum and optimum. I have found that the optimum rent is about 10% below what my competitors are charging for a comparable unit where I live. Turnover is one of the largest drains on profits. So are nuisance maintenance complaints. You will get much more of both if you try to get the absolute maximum that you can get from each unit. In my experience, you will make less money, spend more time, and have more headaches, if you try to squeeze out the absolute highest rents you can get.
Rearding 'leases' v. 'month-to-month' agreements -
I choose Month-to-month agreements because in my opinion it is better for the landlord/owner.....because if a tenant wants to up and move, they will move regardless of the lease. As a landlord, will you really hunt this person down to satisfy your agreement? You may have recourse, but is it worth it? And if they turn out to be less than desirable tenants or if you want to sell before the lease is expired, you are stuck with them.
With the month-to-month, I have been able to remove tenants for no reason at all with 30 or 60 days notice.
I must also note that my rental props are high demand properties in a strong rental market - so my tenants don't want to move and if they do, it's easy to find replacements - But even so, the month-to-month agreements give me, the owner/landlord, control of my property.
Landlording ain't for pussycats.
Good luck,
Noel
One quick way of assessing the rental markets in your area is to contact property managers. I often use them to find tenants for me since I live a long ways from my properties. They can tell you what you will get for different size units and how rents will vary in different neighborhoods. Another thing to watch out for is that there are some property managers that like to be below market. I have identified these in my rental area.
Noel,
Interesting points you made in your post. I never really looked at it from that perspective. Very helpful...
Does anyone else agree or disagree?
[addsig]
Hey,
Just a few random thoughts:
1) If you raise the rent $1, $25 or $100 the tenant sees MORE money leaving their pocket and that never makes them happy. People's responses, most of the time, have little to do with logic and lots to do with emotion. People will sometimes spend $500 to save $100. Strange but true.
2) The tenant does not care if YOUR expenses have gone up. I wouldn't mention it to the tenant. You do NOT have to explain why rent has gone up.
3) If you do NOT raise rents (and I haven't raised rents for over two years), you need to send a letter to the tenant telling them you are NOT raising rents, because you value the relationship you have with them. It costs $0.50 to do this and has a big return.
4) Giving tenants discounts for on time payments (or even early payments) is a bad idea and will get you in trouble. The tenant MUST pay on time. Period. Visa doesn't reward the tenant for making that payment on time, but sure will tack on charges if they are late.
5) Giving free DVD players (or whatever) is a really good idea for getting people in the house. A good DVD is only $100.
6) The cost of one month's vacancy FAR out weighs any normal rent increase.
I haven't tried month to month leases before. The one drawback I can think of offhand is how this would effect your ability to borrow. I know in the past, I have had the mortgage lender tell me that you must have 1 year leases in order to count the rental income towards your overall income. This may not be the same with all lenders, but it was with the ones that offered me the best rates.
Looks like we all have a slightly different prospective. I don't quite agree with Noel on the month-2-month idea... But depended on his area and his long term intention, it may work for him. I'm from the greater Seattle area. Its not hard to find tenants, just a bit harded to find quality tenants! A duplex I bought about 18 months ago was way under market. After talking to the past owner I had a clear view of past tenant payments. At the end of each of there leases, which was within 90 days of my purchase. I informed them that I would me not raising the rents persay but rather passing on overhead charges as in water, sewer, and garbage. (keeping the water a sewer in my name-since it is a lienable utility) this put the utilities in their control and cut over 125.00 month from my cash outflow. It was well received. No big turn overs and I still have the same tenants... both now into their 3rd lease terms. I have just notified them due to tax increses in our area that I will have to raise the rents slightly - $25.00 month. They both agreed that it is cheaper to pay a few dollars more a not have to go through the whole costly moving thing... I think they can also see that I'm not trying to gouge them. just make the property work for me... Ask the tenants to help, not tell them they will! It can be received or received well!... Its been working for me in my properties over the last few years. ...Robert
Just thoughts...
Introduce yourself to the tenants and let them know you are planning on buying the properties.
Let them know upfront that you plan on raising the rents, but you are not sure by how much as of yet.
Ask the tenants what improvements they would like to see happen to justify the rent increase.
Do the improvements.
Raise the rents.
That's my opinion. If you ask the tenants what improvements they want to see, then they might feel more apt to the rent increase. They may feel like their money is going to good use. I know I would feel that way. Try to think like a renter...
Tanya
Bruce,
I totally agree on the No perks for paying on time. Its not an option, its a stipulation of the rental agreement. I have stiff penalities for being late. $50.00 if not received by closing of the business day of the 5th, and $20.00 dollars a day therein after. and notices of course to follow. I did though give all of my tenants a $50.00 gift certificate to a local restraunt.
I did not agree with you on your comment that tenants dont care if your cost go up. Its been my experience just the opposite. They all know that if I have to pay more money out than it will eventually roll down hill to them. Money generates all kinds of emotions.
robertmfoley,
The water and sewer are lienable utilities in Seatle? What do you mean by that. The city can't hold you responsible if the tenant fails to pay them can they?
look2thehorizon,
I have year leases that revert to month-to-month after the year lapses. I also have a fairly high demand for rentals here. I am yet to have a broken lease, so I am lucky. Many of my tenants are section 8 so there is a renewal of leases and the Housing Authority is pretty good if you can document a problem with a tenant that needs to be removed.
The biggest problem I am facing is that tenants sneak in pets that are against the terms of the lease (unless written approval is given). I currently have a vacancy where tenants had two pit bulls that did major damage. Tenants have just bought a house so I know where they are and intend for them to pay for the damage. The pit bulls are cause for non-renewal of insurance so this is a particularly troublesome state of affairs. The problem would be there whether lease or month-to-month since the dogs were not detected, however, with a month -to-month a 30 or 60 day (new in CA) notice might be easier to evict under than a 3 day notice to get rid of the dogs.
I am curious if others out there are experiencing pet problems.
edmeyer - regarding the pet issue: I've had a couple of tenants pull the pet issue and it is a dandy to say the least.
So far, cats have done the most damage - the amonia smell from kitty piss on the carpet, litter box "remains" that kitties kick around, and tenants that don't clean out the litter box, (and I don't even allow cats) = costly and annoying, zero tolerance.
Also, had 2 tenants bring in Pitbulls. I have zero tolerance = immediate notice to terminate tenancy. Tenants who remove pitbulls within 48 hours can stay. Now I make my pet policy very clear to any potential tenant and require that I meet any pet in person prior to approval.
And again, landlording ain't for...............you said it, Pussycats. Hah!
Noel
[addsig]