Raising Rental Rent (Advice needed)

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NYGiantsFan
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Raising Rental Rent (Advice needed)

Post by NYGiantsFan »

We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
CPA without a cause
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Re: Raising Rental Rent (Advice needed)

Post by CPA without a cause »

I would be transparent and lay out to them your increased actual costs (insurance, maintenance, etc) and ask them to pay increased rent equal to your increase in costs. i think that is very reasonable. Show them copies of bills if you need to.
Nate7out
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Re: Raising Rental Rent (Advice needed)

Post by Nate7out »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
This situation shows why you should make a modest rent increase every year rather than waiting until it is too late and then shock your tenant with a 40% increase. Move it up to the market rate - if there is extremely low inventory then you should be able to find a new tenant quickly if necessary.
DVMResident
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Re: Raising Rental Rent (Advice needed)

Post by DVMResident »

Certainly reasonable. I will point out many jurisdictions have a notice period of price increases with 30, 60, or 90 days being common. I recommend checking your local laws.
Jrob6
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Re: Raising Rental Rent (Advice needed)

Post by Jrob6 »

As a landlord, there is a lot to say for having a stable tenant who is taking good care of the house. My least favorite part of rental properties is going through the process of finding and vetting new tenants and then keeping my fingers crossed that they take care of the house. I've been flexible from time to time because of that and because there are always changeover costs when someone moves out: perhaps painting, minor maintenance, and the cost of vacancy while property is made ready to market, marketing the property, and waiting until a new tenant can move in. Even in the best case scenario, you're probably losing a month's rent in vacancy, so you're losing $1400 to make a putative extra $600/month. Just make sure you factor that in.

I think I would echo the transparency thing - let them know your increased costs. My guess is that perhaps insurance and taxes haven't gone up $600? If your increased costs are more modest, I would let them know you're planning to increase the rent to offset some or all of your increased costs. You could also show them data showing comps at $2000 to help them feel better about a more modest rent increase. If you want to keep them, you could take the approach of "We really appreciate you as tenants and appreciate how you've taken care of then property and are good neighbors, so we aren't trying to match our rent to current comps, but we have had these unavoidable cost increases that are hard to absorb on our own." - or something to that effect.
campy2010
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Re: Raising Rental Rent (Advice needed)

Post by campy2010 »

I wouldn't overthink it. Where I live, it's very common knowledge that everyone's rent is going up by A LOT this year. I live in an under market rental and my rent only increased by $300 and I was pleasantly surprised. If your tenants are rational people they know they have a good deal and are probably expecting an above average increase to come their way at some point. In your letter, remind them that you have not increased rent since they moved in, provide your estimate of what is market rate for the unit, what you want the increase to be (maybe a bit less than your target for market rate), and then thank them for their understanding and ongoing good tenancy. In my opinion, providing a lot of detail in what prices have changed and by how much is unnecessary for the average tenant.
Last edited by campy2010 on Wed May 11, 2022 9:17 am, edited 2 times in total.
Lincoln Logs
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Re: Raising Rental Rent (Advice needed)

Post by Lincoln Logs »

From a purely financial standpoint, I think it would be the market value minus some small amount to recognize the frictional expense of getting a new tenant if this one moves due to the rental increase.

That said, they seem to be good tenants that you want to keep long term. And there's a human component when you are dealing with people's homes. $150 increase? It's significant but not egregious, and certainly reasonable in light of your price history, inflation, and the current market.
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Sandtrap
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Re: Raising Rental Rent (Advice needed)

Post by Sandtrap »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
There is a fine line between raising rents, especially after such a long period with no rent raise and a large difference in "market rent", "current rent plus added rising expenses", etc.

1. On one end of things: If you raised rent on the next lease renewal to just under market rents, would the tenant leave?
b) if the tenant left, you would have vacancy expenses plus renovation, etc.
c) would those expenses make up for the difference in the monthly rent raise to just under market.

For example: you raise the rent 300/mo. But, it costs 3-4 months vacancy = 3000 dollars plus renovation costs, let's say 2000 dollars in paint, cleaning fees, etc. So, you spent 5000 to raise the rent for the "new tenant", how long will that take to recover vs raising the old rent and keeping the existing tenant and a lower rent raise?
See?

So. . what is the "middle ground to this????

2. There are various "formulas" and "rules of thumbings" such as: Percent increase annually, etc, or increase per percentage of market valuations, etc.
But, as all "rules of thumbs", it's specific to the rental unit, personal finance need to maximize net profit, etc, etc.

3. The other end of things is taking into account a "human element" in addition to finances.

But, since life and also finances does not fit on a flight plan or spreadsheet with neat enforceable hard line boundries, no matter how people try, consider a more comprehensive picture.

a) Do you have a relationship with the tenant that you would like to keep?
b) Is there some "benevolent" factor? IE: helping out an elderly person and you are still making good profit margins?
c) etc.

j :D

dis laimer: zillions of ways of doing these things with zillions of opinionizations based on zero to nil to extensive experiential experience by zillions of folks. This is only one.
Last edited by Sandtrap on Thu May 12, 2022 8:12 am, edited 1 time in total.
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SmallSaver
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Re: Raising Rental Rent (Advice needed)

Post by SmallSaver »

Raising rent to cover costs is totally reasonable. An unexpected 40% increase is very hard on the resident. You may decide that's the steely-eyed thing to do, but you will be dramatically disrupting someone's life. You could make a modest increase and let them know more will be coming annually as you move the unit to market rate, at least they can adjust and plan for it.
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8foot7
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Re: Raising Rental Rent (Advice needed)

Post by 8foot7 »

I would not raise rent more than 5% on a long-time resident. But I would be transparent with the resident that while you value his or her custom, they are paying way under market (trust me; this is probably not news to the tenant) and your costs had increased to the point you can no longer effectively subsidize his or her rent. A $600 deficit to market is costing you $7,200 a year. That pays for 5 months of vacancy at your current rate. You could have the place open half a year and then rent it out at market and still make the same money you are now. I don't find that productive.

So I'd raise it 5% this year and 5% every year moving forward until you get to within 5% of the market.
This year, 1470; next, 1543.50; 3rd year, 1620.68; 4th year, 1701.71; 5th year, 1786.79.
This increases your cash flow by $840 this year, $1,722 next year, $2,648.16 3rd year, $6,020.52 4th year, $7,041.48 5th year.
You can see the increases pay for half a month of vacancy this year, and almost two months (and current rate) by the end of the second year. That's a bet I'm willing to take, especially if the tenant left and I could then get $2,000/mo.

For a long-time tenant you trust, I might consider applying a portion of his or her security deposit to the increase in this year's rent. If the person has been with you for five years and always paid on time, the risk you mitigate by holding a deposit is, IMO, quite small, and it could be a great way to demonstrate your kindness as a landlord, not burdening your tenant this year with an actual out of pocket increase, but also collecting some additional revenue that you wouldn't otherwise have.

After you get within the market price, be sure to include an automatic 2.5% cost increase every year in your lease. You can always waive this, but it sets expectations and keeps you from falling so far behind.

I would absolutely not spring a 40% rental increase on someone. If I were that someone, and you were bringing me to market like that at one fell swoop, I'd do everything I could to find somewhere else to live--and I probably could, because you're no longer a good deal, and there are probably nicer places to live that have been built in the past few years...
Last edited by 8foot7 on Wed May 11, 2022 10:31 am, edited 1 time in total.
rascott
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Re: Raising Rental Rent (Advice needed)

Post by rascott »

So you are basically subsidizing housing costs for your tenant by $7200/yr.

That's very generous of you.

This is why you should raise rents every year. Even if it's a miniscule amount in line with inflation (or less).

I'd increase it $300, minimum
Tundrama
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Re: Raising Rental Rent (Advice needed)

Post by Tundrama »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
I think this discussion with the renter will be much easier than you believe.

Simple open discussion and layout what you just told us. Then pause, and let the tenant speak.

You may be surprised as they say you’ve been a very gracious landlord. Would a $400/month increase for a year and then up the $200 per the following year.

For sure it could go polar either way. “No way, I can’t afford $100.” If so, I’d turn them out.

Or, “I’ve been feeling guilty because I know how much you’ve sacrificed by not increasing the rent.

It all starts with a great discussion but at the end of the day, if this was your tightly run restaurant, would you be giving friends, neighbors $600 per month worth of free or subsidized meals?

You’ll do fine!
Nate7out
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Re: Raising Rental Rent (Advice needed)

Post by Nate7out »

8foot7 wrote: Wed May 11, 2022 10:10 am I would not raise rent more than 5% on a long-time resident...

So I'd raise it 5% this year and 5% every year moving forward until you get to within 5% of the market.
This year, 1470; next, 1543.50; 3rd year, 1620.68; 4th year, 1701.71; 5th year, 1786.79.
This increases your cash flow by $840 this year, $1,722 next year, $2,648.16 3rd year, $6,020.52 4th year, $7,041.48 5th year.

<snip>

I would absolutely not spring a 40% rental increase on someone.
Under your plan, in 2027 the OP is still 12% below today's market rent. They will probably be 25%+ under current market in 2027. The OP has probably subsidized this tenant to the tune of $15,000+ over the past 5+ years. Your plan is a $20,000+ subsidy for the next 5 years assuming market rent only stays at $2,000.

The analysis in this thread points to a very short payback of 2 to 10 months in raising the rent. Also this will compound forward for many years of higher rent. OP has had this property 5+ years and is presumably a long term investor.

The only way to correct this is to rip the band-aid off and raise the rent appropriately. If OP wants to give a good tenant a discount, they should raise rent to 2.5% below market and explain why the rent is $1950 (or 5% and $1900). In 2023 it should be raised again to within that % of market rent.
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galawdawg
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Re: Raising Rental Rent (Advice needed)

Post by galawdawg »

Rental real estate is a business/investment. Part of the cost of that business/investment is vacancy loss and turnover costs. Don't let fear or reluctance to periodically incur those costs control the return on your investment. I agree that it was a mistake not to increase the rental rate for this tenant in years past. Failing to raise the rental rate to keep up with expenses and/or comparative market rent has now created the need for a significant rental rate which may be unexpected by this particular tenant.

Charging market rent, according to your post, would provide you gross annual rental income of $24,000. Assuming that you might incur a vacancy loss of one month and incur $2,000 of turnover costs, those expenses would reduce your income to $20,000 for the first year of a new tenancy. Perhaps you increase the current rent to $1,800 this year (and implement appropriate increases in future years). Your tenant receives a ten percent (10%) discount from market rent for the next year and your gross rental income is $21,600. Both of you come out ahead. If your tenant moves, so be it. Even with the vacancy loss/costs, you'd still come out better than you would by keeping the rental rate artificially low.
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Re: Raising Rental Rent (Advice needed)

Post by LittleMaggieMae »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Can your tenant afford a $600.00 (from 1400 to 2000) rent increase? In theory, you can guestimate the answer as you have the 5 year old employer info... so, at least, you know what kind of work your tenant does.

Your tenant is in a bind (they may not realize it yet)... if they have to move out (because the new rent increase is too much for their budget to bear - odds are they will have trouble finding another rental they can afford. :(

You say the renew is coming up in the next month - what is the wording in your lease about how much notice you have to give on rent increases AND even how many days before the lease ends do they need to have the renewal? My tenants get their lease renewal documents 90 days before their current lease ends.

If you are going to raise the rent substantially and your tenants will only have 30 to 45 days or less to find a new place because they choose NOT to renew - I would be kind to your long term tenants and perhaps have a back up plan to help get them to their next landlord - maybe a small rent increase and notice that they have to be out of the rental in 120 days. That gives them time to re-work their budget, save up some $$, and find a new place to live.

For most people it takes a month or two to rework their spending plan/budget in order to take on a new bigger ongoing expense. Just saying.
CaptainT
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Re: Raising Rental Rent (Advice needed)

Post by CaptainT »

Yes going forward always increase rent if only a little every year.
I would increase it 300 a month. That is halfway to market rate. I would tell your tenants that market increase is 600 and that you are discounting it to 300 because of their lengthy tenancy and on time payments.
I would also warn them of this increases asap so they can either adjust their budget or look for new place
tashnewbie
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Re: Raising Rental Rent (Advice needed)

Post by tashnewbie »

What does your lease agreement say about how much notice you have to give tenants of rent changes? I suspect it's at least 30 days, probably 60 or more. You should review your lease carefully to see what your options are if you give less than the specified notice. If you're going to increase the rent, then I would give the tenant the specified notice and tell them the new rate will go into effect at the end of the notice period. You can draft the renewal lease agreement accordingly.

I agree with the general consensus that you should increase the rent. How much and how quickly? I don't know.
humblecoder
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Re: Raising Rental Rent (Advice needed)

Post by humblecoder »

It goes without saying that you should check what the local laws are and what is the lease contract with regards to rental increases.

This is business. On the one hand, you are losing out on a potential $7200/year in gross rent. On the other hand, you have a good tenant who pays their rent on time and doesn't cause problems... bird in the hand, so to speak. So that's worth something, I would imagine.

I like the idea of raising the rent by $300/month so you are splitting the difference with the tenant. That will cost you $3600/year, but you are likely to pay that anyway if you have to find a new tenant.

Then factor in increases every year at some market based amount, so this becomes a normal occurrence.
UnLearnYourself
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Re: Raising Rental Rent (Advice needed)

Post by UnLearnYourself »

I have a couple rentals and only increase rents when there is turnover. I eat the increase in taxes, water, and maintenance. I understand this isn't the most savvy approach from a maximizing my investment perspective, but the increases in expenses do not impact my standard of living in the least bit. They are clean, quite, pay their bills, and don't ask me for anything. Grass ain't always greener on the other side, and a couple grand extra per year is not worth it to me to flirt with getting a bad tenant (even though I do background, credit, and referral checks on all new tenants). Bad tenants can easily cost you tens of thousands if things go wrong.

The way I look at it is I can increase rents, and sure an extra couple hundred bucks per month would be nice, but I don't need it. The tenants on the other hand that money makes a drastic impact to their monthly affordability and lifestyle. As it stands they are helping me pay for my mortgage and give me a great return on investment compared to alternatives. If I can help them achieve a better standard of living than other landlords across town then I feel really good about that, and feel we're in a win win mutually beneficial situation.

So beyond all standard investment or real estate metrics and best practices, I always ask the question of can you afford to cut them some slack? If so, maybe you let it go.

Too much blind greed these days and lots and lots and lots of people are really hurting relative to the rental and purchase market, so maybe your good fortune and good will can be a slight mitigating factor in an otherwise cold space. Chances are tenants will move on eventually and you'll have your chance to boost rents for whomever follows.
exodusNH
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Re: Raising Rental Rent (Advice needed)

Post by exodusNH »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
Your baseline is obviously the increase in your costs over the years.

After that, you need to keep in mind that the housing market will soften at some point. When that happens, do you want your tenant to flee? Even if they accept the market adjustment now (because they have no choice), they may start looking and jump ship as soon as their lease is over. Then, you're going to be in a cycle of rotating tenants until you find one you really like.

Given that they've been there 5 years, you probably have to do some level of repairs before you can rent it out again. Make sure you add the loss of one month's rent while that work is being done.

Regardless, on the new lease, make sure you add in an automatic increase of 2%-3% so that you don't find yourself in the situation again.

Also, make sure you check with your local laws to see if there's any limit on rent increases.
Ktorrence
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Re: Raising Rental Rent (Advice needed)

Post by Ktorrence »

This reminds me when I purchased my grandmother’s rental house and immediately raised the rent from 450.00 to market value(800.00). The longtime tenants balked and moved out. I refurbished the house and found new tenants within a month. I later on found out that the old tenants were paying 850.00 a month for their new place. They knew they were getting a steal from my grandmother.
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Re: Raising Rental Rent (Advice needed)

Post by mega317 »

I could never do what you guys do. Anything except maybe the 5% plan is going to be a jolt to this family--either an unexpected move or a huge financial change. You have put yourself in a position to either make someone's life more difficult or get a suboptimal return on your investment. I don't envy you.
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Re: Raising Rental Rent (Advice needed)

Post by cchrissyy »

+1 to the suggestion where you say market rate is $x but i want to keep you as tenants so the increase will be $y

most likely when you do that, they will realize there is nothing better on the market so they will stay, and they will appreciate you didn't raise rent as much as you could have this year or all those others.

my advice going forward is don't let it get this skewed! small raises every year are easier for tenants to handle. Making it predictable benefits you and them. I'm a landlord and this is my least favorite part. So what i did is wrote a clause in the lease agreement that the rent will increase upon renewal by $x. you could do a dollar amount or a percent. the positives of this approach are you only have to discuss it once, in the initial signing, and as long as the tenant stays everybody knows exactly what it means for rent. The negative of this approach is predicting the future is hard, including future market rents. After many years I'm probably below market myself, but not as bad as if I had avoided the conversation and/or not had those small raises in the contract.
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Stoic9
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Re: Raising Rental Rent (Advice needed)

Post by Stoic9 »

We had a similar situation, I was gone a lot (military) and was very hands off. When I retired a did a deep dive and found my management company (knew every tenant by first name) convinced my spouse that raising rents would cause high turn over. Rents were not raised if tenant stayed (some 10-14 years but most at least 5). Other side of the coin....damn this is the cheapest rent anywhere I'm never leaving! I immediately started raising 10% a year (120 day notice). The letter outlined taxes/ins increases, and that IRS requires I charge Fair Market Rent for the area. Actually the management person blamed it on me and said 'its his retirement'. Retired 5 years now and most rents are up at least 100-150% from 5 years ago. Many people did move on which allowed for us to do some big improvements. Still have a few that never left and seem content with 10% a year increase.
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BrooklynInvest
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Re: Raising Rental Rent (Advice needed)

Post by BrooklynInvest »

Your cost increase isn't the issue.

When you rented to them was it at market, and rents have generally increased by, what 40% over the last 5 years causing the discrepancy?

I just increased my tenant's rent for the first time in 3 years. When I've renewed in the past I've tried to manage expectations and said to them "let's keep it the same this year but it may well go up next." They have kids in school. I don't want to cause a large disruption to their lives if I can help it. Me, the good tenant discount is at least 5-10%. This year's hike was just under 3% but then the gap between their rent and market isn't 40%. It's maybe 10-15. I'll probably keep it at this level for a couple of years. But we have a 2-family house so live in close proximity. It's no fun to live this close to bad tenants.

Good luck OP,
dred pirate
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Re: Raising Rental Rent (Advice needed)

Post by dred pirate »

I was on the other side of this a few years ago. Our rent did not go up for 3 years (until we eventually bought a place and moved out). I knew we were paying under market rate, and each time we renewed, I expected a letter saying the rent was going up. It never came, and I though "dang, this owner isn't very smart, but I will take it" Maybe I am more aware of the comparable places than others, but I think a small 5% raise each year for a couple of years to try to bridge the gap is reasonable.
AtlBoglehead
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Re: Raising Rental Rent (Advice needed)

Post by AtlBoglehead »

I've owned a few rental properties since 2003. I've had some short-term tenants, but recently most have been long-term. In fact, a 10-yr tenant just moved out. I'd only raised her rent once in 10 years. Another tenant has been there nearly 8 years. She, too, has only had one increase. Finally, I have decided to start raising rents by 3% per yr, rounded to the nearest $5. I've written that into the new leases and into an addendum for the old leases. From now on tenants will know in advance from year to year, and we will not have to discuss it. Just a brief reminder should do the trick. I am told that rents in my area have gone up 20-30% this year alone. But if I can maintain 2.5-3% year in and year out, regardless of whether inflation is way above that, as during these last 2 years, or somewhat below, as in previous years, (and go to just below market between tenants), I think I can live with that. I live near a big city, so I'm sure I could get much higher percentage increases by letting them go, or I could sell the property because we are certainly in a peak selling season. But I'm getting older, and I'd like to save the capital gains tax for my kids. Plus, the peace I gain from a "steady in the saddle" approach brings comfort that means more to me at this time in my life than more cash flow, as long as I am making some profit for my time and energy and helping out those who are helping me leave a financial legacy for my children.
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Re: Raising Rental Rent (Advice needed)

Post by White Coat Investor »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
Charge market rent or get out of the business.
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Supergrover
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Re: Raising Rental Rent (Advice needed)

Post by Supergrover »

In NJ there is a cap on how much you can raise the rent in one year. So if you don’t raise it for a few years, you can fall really behind.
I haven’t raised the rent for 3 years on an A+ tenant. I wish I did, no matter how small. I love the idea of writing it into the Lease. Thank you all for that tip!
Topic Author
NYGiantsFan
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Re: Raising Rental Rent (Advice needed)

Post by NYGiantsFan »

Lincoln Logs wrote: Wed May 11, 2022 9:16 am From a purely financial standpoint, I think it would be the market value minus some small amount to recognize the frictional expense of getting a new tenant if this one moves due to the rental increase.

That said, they seem to be good tenants that you want to keep long term. And there's a human component when you are dealing with people's homes. $150 increase? It's significant but not egregious, and certainly reasonable in light of your price history, inflation, and the current market.
I am leaning toward your suggested number. Tenants have conveyed in the past that they are looking to purchase the house in 2021 (last year) but at the same time, they asked annual lease in 2021. Due to current market conditions, I doubt that they will be able to purchase as real estate prices went up by more than 10% in the last one year. I spoke to realtor 2 weeks back and he said one reasonably priced house had 44 offers in a week.
Except normal wear and tear, they are treating property with respect and keeping it clean.
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NYGiantsFan
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Re: Raising Rental Rent (Advice needed)

Post by NYGiantsFan »

Sandtrap wrote: Wed May 11, 2022 9:37 am
NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
There is a fine line between raising rents, especially after such a long period with no rent raise and a large difference in "market rent", "current rent plus added rising expenses", etc.

1. On one end of things: If you raised rent on the next lease renewal to just under market rents, would the tenant leave?
b) if the tenant left, you would have vacancy expenses plus renovation, etc.
c) would those expenses make up for the difference in the monthly rent raise to just under market.

For example: you raise the rent 300/mo. But, it costs 3-4 months vacancy = 3000 dollars plus renovation costs, let's say 2000 dollars in paint, cleaning fees, etc. So, you spent 5000 to raise the rent for the "new tenant", how long will that take to recover vs raising the old rent and keeping the existing tenant and a lower rent raise?
See?

So. . what is the "middle ground to this????

2. There are various "formulas" and "rules of thumbings" such as: Percent increase annually, etc, or increase per percentage of market valuations, etc.
But, as all "rules of thumbs", it's specific to the rental unit, personal finance need to maximize net profit, etc, etc.

3. The other end of things is taking into account a "human element" in addition to finances.

But, since life and also finances does not fit on a flight plan or spreadsheet with neat enforceable hard line boundries, no matter how people try, consider a more comprehensive picture.

a) Do you have a relationship with the tenant that you would like to keep?
b) Is there some "benevolent" factor? IE: helping out an elderly person and you are still making good profit margins?
c) etc.

j :D

dis laimer: zillions of ways of doing these things with zillions of opinionizations based on zero to nil to extensive experiential experience by zillions of folks. This is only one.
This can be subject matter of behavioral economics.
There are 3 key variables here.
-Market price - It tells me to raise the price.
-Carrying cost - Property has been paid off and was purchased at significant discount during last downturn (2011). It is generating 10+ cap rate on original investment (not counting appreciation).
-Benevolent factor - Tenant is first generation immigrant family (less than 6 years in US). They are doing reasonably OK financially.
LittleMaggieMae
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Re: Raising Rental Rent (Advice needed)

Post by LittleMaggieMae »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+).

Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.
Another thing to think about IF you up the rent to market value - the units getting market value most likely have been updated.
Your condo probably hasn't been painted in 5 years+. The carpeting is 5 years+ old, the bathroom fixtures are 5 years+ old, the kitchen fixtures (and appliances) are 5 years+ old.

Odds are if your tenants can afford 2K per month in rent - they may NOT want to pay that to live in your dated unit. For 600 extra a month they might be able to get a way nicer looking unit (even if its in the same building with the same layout.) They might be able to get some other intangible perk by moving to another unit (even if it costs more) - further from some source of noise (elevators or something else) or better natural light or better 'view'.

I'm assuming the other landlords in your building aren't the equivalent of "slum lords" - charging top dollar for overly dated or worn out units.
cheezit
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Re: Raising Rental Rent (Advice needed)

Post by cheezit »

Bogleheads obviously has no competence in making moral proclamations (ie. what you "should" do or what is "reasonable" to do). The most important things here are honesty and courtesy. Decide what you want to do, and communicate it to your tenant with enough notice that they can survey the market and make their own informed decision. Giving reasonable notice also keeps you from getting left in the lurch if they decline to sign at the last moment.

Eg. if you want to increase the rent to cover your costs, say "my costs have gone up $x so I'm increasing the rent by $x. Would you like to renew for another year? Please let me know by $date so that we can both make arrangements if you'd like to move out."

Or eg. if you want to increase the rent to market rate, say "I estimate that your alternatives have gotten worse and as a result I can extract more income from you, to the tune of $y. Would you like to renew for another year? Please let me know by $date so that we can both make arrangements if you'd like to move out."

It's simple and makes things less stressful for the people on both sides of the transaction.
Katietsu
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Re: Raising Rental Rent (Advice needed)

Post by Katietsu »

NYGiantsFan wrote: Thu May 12, 2022 9:55 am
Lincoln Logs wrote: Wed May 11, 2022 9:16 am From a purely financial standpoint, I think it would be the market value minus some small amount to recognize the frictional expense of getting a new tenant if this one moves due to the rental increase.

That said, they seem to be good tenants that you want to keep long term. And there's a human component when you are dealing with people's homes. $150 increase? It's significant but not egregious, and certainly reasonable in light of your price history, inflation, and the current market.
I am leaning toward your suggested number. Tenants have conveyed in the past that they are looking to purchase the house in 2021 (last year) but at the same time, they asked annual lease in 2021.
I think this is a good compromise. If you do want to go further, give them more notice, even if not legally required. Being a decent human being to me would dictate a minimum of a 3 month notice before introducing a large rent increase of 40% after years of stable rent.
Topic Author
NYGiantsFan
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Re: Raising Rental Rent (Advice needed)

Post by NYGiantsFan »

LittleMaggieMae wrote: Thu May 12, 2022 10:07 am
Your condo probably hasn't been painted in 5 years+. The carpeting is 5 years+ old, the bathroom fixtures are 5 years+ old, the kitchen fixtures (and appliances) are 5 years+ old.

Odds are if your tenants can afford 2K per month in rent - they may NOT want to pay that to live in your dated unit. For 600 extra a month they might be able to get a way nicer looking unit (even if its in the same building with the same layout.) They might be able to get some other intangible perk by moving to another unit (even if it costs more) - further from some source of noise (elevators or something else) or better natural light or better 'view'.

I'm assuming the other landlords in your building aren't the equivalent of "slum lords" - charging top dollar for overly dated or worn out units.

You are right regarding paint and carpet age. Except that, Other units are similar in conditions including kitchen. Our unit has better location (corner) in Condo. Condo is non-elevator building (3 stories) and is spread out with 200+ units.
valleyrock
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Re: Raising Rental Rent (Advice needed)

Post by valleyrock »

Consider raising it some every year. Tell the tenant why and that you don't want to shock them. 4 or 5% per year quickly gets you where you want to be, while the tenant has time to adjust.
JackoC
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Re: Raising Rental Rent (Advice needed)

Post by JackoC »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Whenever this topic comes up, seems to me goes back to the basics of what one's purpose is in having rental real estate. We're in real estate to make money long term while following the law (that can be determined objectively) and basic ethics as we see them (a judgement call with no one answer for everyone). But we are not in it for the good feeling of making somebody else's life easier by charging below market rent as a goal in itself. Some posts on this topic have said that outright. And I'm not judging that, people who *realize* that's part of what they are actually seeking in RE are ahead of those acting similarly but telling themselves they aren't. Eg. charging 70% of market is never going to be justified, financially, by 'but it's a good tenant'. That's mixing charity and business.

Therefore we would not let a rent get to only 70% of market on a property we'd owned awhile. Although that actually is true of one now, that we bought pretty recently, because the previous owner let that happen. The two tenants pay $1k and $2k, market may be 50% more for both. Fortunately/unfortunately neither tenant is especially good. My kid who manages that property can personally network as good or better tenants from her wide circle of friends and acquaintances in that county. We'll probably raise it to market in one shot as the current leases expire.*

*another common red herring on these threads is assuming that the business oriented landlord will pick some wishful number they can't get then the place end up empty for months or years. But this gets back to basics: if you can't reasonably accurately determine what market rent is in the area, why aren't you seeking to get better at it, and if not willing to try why do RE at all?
brian91480
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Location: Minnesota

Re: Raising Rental Rent (Advice needed)

Post by brian91480 »

NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
Same situation as me.... almost to a T. I have great tenants and I haven't raised the rent since they moved in 4 years ago.

But the harsh reality is... I'm running a business and I have increasing bills. Same as you. So I raised their rent this year by over 5%... starting next month.

They're not thrilled. But the rent I'm offering is still below market rate... so they're still getting a good deal. I plan to raise their rent again next year also, as I expect my costs to keep going up.

Even as I raise their rent in the future... I'll always keep the amount below market rate. Being a good tenant is valuable, and you shouldn't take that for granted.

-- Brian
exodusNH
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Re: Raising Rental Rent (Advice needed)

Post by exodusNH »

brian91480 wrote: Thu May 12, 2022 11:37 pm
NYGiantsFan wrote: Wed May 11, 2022 8:35 am We own condo with long time tenant (5 years+). Normally, Our policy is not to raise rent and we haven't raised rent for 5+ years. We have seen our property tax and maintenance going up during these years (similar to inflation rate).
Unit is coming up for renewal in next month.
Current rent is $1400 (2 bedroom, 1 bath). I performed research and similar units in the neighborhood are going for $2000 (Rent has gone up in last 2 years). There is extremely low inventory in the area.

What can be the reasonable raise (of the rent) here? We are happy with tenant but at the same time we don't want to underprice the unit significantly.
I will appreciate your insights.
Thanks
Same situation as me.... almost to a T. I have great tenants and I haven't raised the rent since they moved in 4 years ago.

But the harsh reality is... I'm running a business and I have increasing bills. Same as you. So I raised their rent this year by over 5%... starting next month.

They're not thrilled. But the rent I'm offering is still below market rate... so they're still getting a good deal. I plan to raise their rent again next year also, as I expect my costs to keep going up.

Even as I raise their rent in the future... I'll always keep the amount below market rate. Being a good tenant is valuable, and you shouldn't take that for granted.

-- Brian
Hey, the boat and gold-flecked caviar aren't going to buy themselves! ;) 5% after four years seems very fair. The heads-up for next year is also helpful and avoids sticker shock at a vulnerable time.
togb
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Re: Raising Rental Rent (Advice needed)

Post by togb »

When a tenant is good/mostly trouble free, I hate to raise the rent. I have good tenants-- pay on time, take care of the place, perhaps a little high maintenance but good tenants. My property taxes went up 40% in the last two years. The place is rented for about $250/mo less than market rate for comparable homes.

I ended up raising the rent $75, with 90 days advance notice. Basically it covered half of the increase, and I'm absorbing the other half. That's about a 4% increase. I don't expect them to stay past this year, as they are building a home. (I actually thought they'd be ready to move out, but instead the year lease is up and they will be going month to month.) I've committed they can stay as long as they need to, to get their place ready-- and I will not do another rent increase unless it's needed next year based on property taxes going up more.

For me, that's a good balance between the income, and being fair with people. When they move out, I'll raise the rent to closer to market rate, whatever that is at that time.
boogle_12
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Re: Raising Rental Rent (Advice needed)

Post by boogle_12 »

I agree with the raising it by $300 idea. If there is low inventory for a place where there is a lot of people looking to rent, I see no reason why you should continue being so far below market rate. A $150 increase is too little. They would be saving themselves the hassle of moving out and waiting for anything lower than $1700/month (which is not going to happen based on what you shared). And I'm pretty sure someone would jump on your listing in a month if they did in fact move out.
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