Setting Rent
I'm new to Real Estate investing. I am closing on a property that is currently renting below market. I need to raise the rents in order for it to cash flow. If I increase it by $100 per month (each unit) it will flow positive but there is still $25 or so per month that it could go in order to bring it to market rent. Should I offer my rents below market in order to attract good tenents or put it up the additional $25 in order to screen out those who cannot afford it? I guess arguments could be made either way and I would like to hear of your experiences. Thanks in advance, CATAMAN
You might want to contact a property management company to find what the market is. If you know what the market is and I am reading your post correctly, it sounds like market is $75/ month below what you need to be positive. Or is the $25/ month above the $100?
My preference is to get the most I can. If I can fill at the higher price, I will do so. I have never had anyone decide to move because they found a unit for $25/ month less.
Sorry for the confusion. I am buying a property that has rents set at $125 below market (I can raise them $125 and be at market rates). One of the bad aspects of buying a property with below market rents is that the adjustment will be seen as large (as a percentage increase). The rents are low because the previous owner is financially "well off" and didn't care to raise rents much.
First off, a $25 swing in rent won't seperate the "good" from the "bad" tenants.
Face it, an additonal $25 per month is not a demographic or economic divider. If you were talking an additional $500 per month, that's a slightly different story.
But even then, just because your tenant is in a higher income bracket doesn't garaunteee they're not scum.
That said, my philosophy is if you can get it, then charge it.
Put it this way, we're in a pretty soft rental market nationally. I'm positive this will begin to change as interest rates creep higher. The logic is if you can't afford to buy, you have to rent. And when rates cross the 7% mark, I predict you'll see renters returning.
But if in your particular market you can charge an additional $25 per month for your units, then why wouldn't you do it? Why take less, when you can get more? The answer seems self-evident.
Now, if you're talking about a long-term loyal tenant situation, again, that's a different story. But you're not. Right?
Here in Boston, I'm charging less than market value because I have to. There's far too much supply out there, and far too little demand.
But you better believe when supply falls and demand increases and I can raise my rents back to full market value, I'll do so ASAP.
Again, why wouldn't I?
Take care.
[addsig]
1. You can only make adjustments according to the lease.
2. As above posts say...the market needs to be considered seriously.
3. Nothing like a vacancy or two to take those negatives into danger zone!
4. Low rents, market rents, or top of the market rents will not create good or bad tenants.
cataman
Quote:I am closing on a property that is currently renting below market. I need to raise the rents in order for it to cash flow. When you purchase the property you inherit the tenants and the current leases. The terms of the leases you inherit must be honored. You can not raise rents until the current leases expire.
Quote:If I increase it by $100 per month (each unit) it will flow positive but there is still $25 or so per month that it could go in order to bring it to market rent. Should I offer my rents below market in order to attract good tenents or put it up the additional $25 in order to screen out those who cannot afford it?How quickly you raise rents is up to you. If the tenants are worth keeping, then approach them early about your intent to raise rents. Tell the tenants that you may have to raise the rent $100 per month. If the tenant says OK, then raise the rent $100. If the tenant balks, then ask how much of an increase would the tenant accept. If the tenant says $50, then raise the rent $50 per month for three consequetive lease renewals.
Personally, I prefer to give modest rent increases to current tenants even though my rent is below market. When the property turns over, then I advertise at slight less than market rent.
Your idea about keeping rent $25 below the high end of your market is OK but not for the reason you state. I like to offer rents slightly below the high end of the market to increase my applicant pool and reduce turnover, resulting in a lower vacancy rate.