Managing Below-Market Rent

Dealing with below-market rent can be a challenge for landlords. While it may feel uncomfortable to raise rents, it’s essential to consider the financial and legal aspects of managing your rental property. In this guide, we’ll explore the reasons you may find yourself at below-market rent and provide practical advice on how to handle it effectively.

Why Below-Market Rent Happens:

1. Inherited Residents:

Many landlords find themselves with inherited tenants when they purchase a property. It’s common knowledge that new ownership often leads to rent increases, especially when capital improvements are planned. Tenants usually anticipate this change, so it’s not usually a surprise.

2. Not Raising Rents Annually:

It’s advisable to increase rents annually, even if it’s a modest amount. Fearing vacancies, some landlords hesitate to raise rents, resulting in properties rented far below market rates over time. Remember, a slight increase each year is often better than a sudden large hike.

3. Long-Term Month-to-Month Tenants:

Month-to-month leases without renewal dates can lead to forgotten rent adjustments. Even long-term tenants can find themselves paying below-market rent if rates in the area have increased substantially.

How to Decide on Rent Increases:

Ethical Considerations:

Charging market rent isn’t immoral; it’s a business decision. If you can offer a lower rate that benefits your tenant more than you, it’s a generous gesture. Just remember, it may not always be appreciated or acknowledged in a special way.

Financial Considerations:

Empty properties cost more than slightly below-market rent. Analyze your overall business strategy, especially during times of high turnovers or property maintenance. While raising rents is generally wise, assess whether it aligns with your business goals.

Legal Considerations:

Local and state laws can restrict rent increases. Research your area’s regulations to ensure compliance. Rent control and eviction laws vary widely, so be aware of the legal framework in your location.

How to Raise Rent Effectively:

1. Set Expectations:

From the beginning, communicate to tenants that rent increases may occur annually. This helps manage their expectations and reduces surprise when it happens.

2. Written Notice:

When it’s time to raise the rent, provide written notice in accordance with your state/counties required number of days before the lease ends. Sending both a physical letter, posting on the door and an email ensures your tenant receives the information.

3. Keep it Professional:

Maintain a respectful and professional tone in your communication. If the increase exceeds 1-3%, provide a brief explanation, such as mentioning inflation or the property’s lack of rent adjustment in recent years.

Managing below-market rent requires a balanced approach. While it’s crucial to run your rental property as a business, it’s equally important to consider the impact on your tenants. By understanding the reasons why investments fall below-market rent at times and following ethical, financial, and legal guidelines, you can make informed decisions that benefit both your business and your tenants. Remember, it’s a business decision, and treating it as such will help you navigate this challenge effectively.