Good tenant is 190 under market at renewal. Raise or leave it

Question

Renewal comes up in seven weeks on a three bedroom that leases in that pocket at about 2,040 today. My tenant is at 1,850, has been there twenty-six months, pays on the first every single month, and calls me before small things become large things. She replaced two toilet flappers herself and told me after.

Going to market is 190 a month, 2,280 a year. If she leaves, my real turn cost from the houses I've worked on is somewhere between 2,200 and 3,400 depending on paint and carpet, plus three to five weeks vacant, plus a leasing fee if I use anyone. That's most of the first year's increase gone, and I inherit an unknown tenant.

The counterargument I keep hearing from people with more doors than me is that below-market rent compounds. Two more years of holding flat and I'm 300 under, and then the increase I eventually need is one nobody accepts, so I end up with the turn anyway and I've paid for the privilege of waiting. There's also the resale angle, since a buyer underwrites the lease in place, not the rent I could have charged.

The split-the-difference version is 1,950 with a note that says where market is. That keeps her, keeps me closer to the curve, and costs me about 90 a month against full market.

Rent growth is running near 1.3 percent nationally, which makes a 10 percent catch-up feel aggressive to a tenant reading the same headlines. What do you actually do at renewal?

nicole_adeyemi · Answer

I've held rents flat on good tenants for years and the thing it cost me wasn't cash flow, it was the appraisal and the eventual sale. An underwriter looks at the lease, and a 190 gap capitalizes into real money at any reasonable cap rate. That doesn't tell you what to do this year, but it tells you the gap is not free.

raj_mehta14 · Answer

Naive question. If you go to 1,950 now and market keeps moving, do you just have the same conversation next year with a worse gap? Or is the point that a small increase every year trains everyone that increases happen?

stephen_ok9 · Answer

vellum, that second thing is most of it. The households that blow up at renewal are the ones who went three years at the same number and then got asked for 300. An annual move, even a small one, is a different conversation than a correction.

cobalt, the number I'd want before deciding is your actual re-lease time in that pocket right now, not the one from two years ago. Five weeks vacant and 2,900 of turn against 2,280 of annual gain means going to market is a losing trade in year one and a winning one by year three. Whether you're willing to fund years one and two is the whole question.

monica_tran3 · Answer

The customer who never complains is worth paying for, and five years of running a service business taught me that. I'd go 1,950 and I'd tell her plainly why, including what market is. People accept increases they understand.

aaron_fitz10 · Answer

Doesn't telling her market is 2,040 invite her to go shop at 2,040 and find something newer?

carlos_nunez · Answer

kestrel, she can already see market on her phone in four minutes. Assuming tenants don't know what things rent for stopped being true a long time ago. What she doesn't know is that moving costs her a deposit, a truck, and two days off work, and that's the real reason a below-market renewal holds.

cobalt, I've done both. Full market on a two year tenant cost me a turn and I regretted it. Full market on a four year tenant who was clearly settled went through with a shrug. Length of stay isn't the signal, roots are. Kids in the school, spouse working nearby, garden in the yard.

wendy_park48 · Answer

Check your lease language before you decide anything, because some leases specify notice periods for rent changes and month-to-month conversion terms that fire automatically if you miss a date, and the required notice period for a rent increase is set by state law and in some places by city ordinance. I've read leases where the renewal clause did something the owner didn't expect. Whatever you send, send it in writing and keep the copy.

sonia_alvarez · Answer

If you ever plan to refinance this house, the lease in place is what the DSCR gets calculated on with most lenders who underwrite that way, so the gap can affect proceeds, and you'd want to confirm the current approach in writing with whoever you're borrowing from. That pushed me toward closing gaps earlier than my instincts wanted.

Good tenant is 190 under market at renewal. Raise or leave it

8 replies