Dear Monty: I bought a six-unit apartment building recently.
How can I soften the blow to the tenants when I raise their rent?
Monty’s Answer: The nature of your question suggests this is your first rental property.
There is little information about the property, such as location, age condition, staggered lease terms, et cetera.
It is unclear why you want to raise the rent.
Is the property currently cash flowing?
As a new owner, consider going slowly unless your due diligence included detailed research of the rental market in your area.
What are the rents in similar apartment units?
Are all the apartment projects fully occupied?
How long does it take to secure a tenant?
Assuming you determine it is a landlord’s market, what is the most you can raise rents without emptying the building?
Conduct basic research.
Research will provide new knowledge to gain confidence in your decisions.
Your objective is to learn how the rental market for similar properties is performing in your neighborhood.
Many cities may have planning departments or housing authorities with good information.
There are also private companies that sell data.
Enter “find housing rental data” to see many sources appear on your computer screen.
You can also do it yourself by tracking rental activity.
There are many tools for landlords and tenants online.
Here are two examples I found in my search: rentometer.com for tenants and mysmartmove.com for landlords.
Action steps
- You have a relatively small project. Ask each tenant to meet with you to get acquainted and learn how they like living there, what they like and don’t like, and what improvements they would like to see. Also, ask how long they expect to live there. Let them know upfront that you may not be able to do everything.
- When you raise the rent, share the data that justifies the increase. Real estate taxes, insurance premiums and maintenance cost increases are examples. If a similar apartment anywhere else is $50 higher, and you ask for $25, it gives them a reason to stay. Some landlords build increases right into the lease.
- Not all tenants are created equal. You are under no obligation to across-the-board increases. If five tenants complain about the sixth tenant, consider raising that tenant’s rental rate above the market rate or not renewing their lease. If an apartment is well kept, or neglected, consider that circumstance in the increase. Consider incentivizing the long-term tenant with a softer increase. Check your lease agreement and local and state law to ensure you conform to the amount of notice time.
- Suppose they all want to see the parking lot paved. Consider doing a cost/benefit analysis with a five-year payback to determine if a rent increase can justify it. Consider that such an improvement likely increases the property value. Then pick a portion of the cost that the building absorbs.
Add value to the property.
It is possible to negotiate a higher rent by making improvements important to the tenant.
Do the math, judge the tenant’s reaction and then decide your course of action.
Soften the blow by adding value, and some tenants may stay.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter at @dearmonty or DearMonty.com.