A moral dilemma in negotating

[rj.phila]

hey all, im hoping you guys would weigh in with some suggestions on how to go about a moral dilemma i have, and how to breach a subject-at extreme cases, if you think i shouldnt at all and just take the bird in the hand, i'd like to know as well. here it is:

i currently own a property that i have tenants in. its a 3 story, 6 bdrm twin that used to be our primary residence. i spent 2003-2010 rehabbing it. i can safely say its the nicest house on the block; stainless steel new appliances, wash/dry, 2 new baths, great condition, new replacement windows, all up to date. also, most of the houses on the block were chopped into multi-units, so its somewhat rare in that it still has the original floor plan.

i currently have it rented for 1400/month. the tenants are friends of a friend, and are very nice. i like them alot. the VERBAL understanding we had was that i would "give them a break" on rent in exchange for them treating the house like it was "their own"-not trash it like college kids would, AS WELL AS their intention to be long-term tenants, not moving out after a year. we did a 1 year lease. they moved in sept 2010, the month we moved out, so there was no lag time for it to be unoccupied. at the time, i eyeballed the rental value at around 2250-2500/month. in hindsight, its probably closer to 2700/month-my neighbor is renting a 3-bdrm unit that is a relative ****hole for 2000/month; the unit is exactly 1/2 the size of my house.

here's my dilemma-their lease is up this sept, but just asked to sign on for another year. i'd like to have them stay, but frankly, 1400/mo is literally about 1/2 of the fair market value, so i'd like to raise the rent. im willing to discount the rent in exchange for keeping them in-if i were able to do 1800/mo for the next lease, i'd be happy(still about 70% of FMV), but i'm concerned about them feeling "sandbagged". while at the end of the day, i know that they are tenants and its a business arrangement, i would like to keep a good repoire with them. this is not my only rental prop, and thus i know that finding good tenants is one of the more valuable aspects of investment props. vacancy and general dickheadedness can make the landlord role drag, and im happy with everything about the current situation, except knowing that im leaving about 1000-1300 on the table every month. if that number was more like 700-1000, i'd feel much more content.

(in the interest of full disclosure, i initially pitched 1500/mo for rent, and they requested 1400, which was such a relatively small amount that i relented in the interest of good faith negotiating.)

should i breach this subject? if so, how? should i just lay out my case; just as its stated here? thanks for any negotiating advice.

[JuniorTT]

I think they know they're getting a steal and that's why they already approached you 5 months before the lease is up to try to renew.

If it's as nice as you say it is I'd bump it up to $2k/mo. That's still under $700/mo per person.

[MonkeyMama]

I think I would just talk to them about it. A good compromise may be $1600/month next year and $1800/month the following year. Talk to them about it and give them some notice. No one wants a 29% increase in rent out of nowhere. Even if they are getting a steal.

When I rented, the way my landlord handled this? Super crazy high rent appreciation? As long as we were good/careful tenants, he raised the rent $100 every single year. None of us were going to complain, because we were getting a steal. BUT, I think the psychologically is very different once you do a large jump up in rent. It's kind of akin to a pay cut. Employers generally don't cut your pay and landlords generally don't raise your rent astronomically. Not if they want to keep you, anyway. Some may consider my landlord stupid, but we didn't trash his house. I know too many landlords who paid TONS to clean up after bad tenants.

I don't think the average person could afford a $400/month increase in rent.

I am sure you will get lots of other/better advice, but kind of my thoughts reading this.

Your only option may be to get new tenants to get a better price, honestly. But you won't know for sure until you talk to them about it.

[jpg7n16]

I would also do some market research, and pull some of the comparison rentals in the area. Don't just use your one comparison guy, because his could just be overpriced.

Try using: RentalHomesPlus.com | Homes for Rent - Houses, Condos, Townhomes and Duplexes | Rental Property

in your area, to show just how great a value it would still be at $2400 or whatever new rent you'd like to set up. Make it a fair rent at first, then negotiate down if you feel like it's worth it enough to keep them in the home as opposed to a different group of renters.

Maybe start with $2400 (if a fair market rental rate) and when they're like 'whoa that's quite a jump' you work it back down to $2k cause you like em so much - that would help them feel better about $2k rent

And then obviously the advice above is good too. Definitely talk to them about your dilemma (after you get your facts to back up your position)

[maat55]

If I knew I could get 2k or above, I would in a heartbeat. You should not find very many people who can afford 2k+ that are deadbeats. Get a creditcheck and references.

[snafu]

Only you can decide what good tenants are worth to you. Once you establish 'market value' given them written notice of the increase. If you get it to them by May 1 they have lot of time to adjust for the increase or give you 30 days notice in advance of the end of their current contact.

[rj.phila]

thanks, guys. good info here.

[kork13]

My parents have the same type of agreement for a home they own and are currently renting. Bottom line, just talk to them. Lay down the facts, show them that a comparable home would rent for nearly twice what they're paying, and explain your situation. Show your appreciation for taking good care of the house, and that you're still willing to 'help them out', but also that you need to agree on a fair increase to the rent. I would start with $2000 as a "fair, reasonable expectation" for them to pay (which really--it is!). If they can afford it and are agreeable to it, great. If not, you can negotiate downward from there, aiming perhaps to settle somewhere in the middle, between $1600-$1800. You might also consider a longer lease in exchange for a lower (than desired) monthly rent--stability is valuable in rentals, particularly when the renter cares for the property well.

[rj.phila]

kork13-great post, thanks. that corroborates my immediate instincts in negotiating almost exactly.

[Joan.of.the.Arch]

As a renter, my contracts have always included a yearly raise in rent by percentage. Seems like they were 6% to 7.5%. So I signed a year's contract, but knew ahead of time how much to expect to pay the next year. I'll tell you though--when I moved out of the last apartment, the landlord advertised it at the same price I'd been paying. I presume he did not expect he could find renters if the price went up anymore at the point in time.

[disneysteve]

I'm sure they realize they are paying well under market rates. Why not sit down with them, tell them that you'd still like to help them out but really need to get more for the rental. You understand that a big hike could be a problem so offer to do smaller, but more frequent, incremental hikes. There is no law that says you can only raise the rent ever year. Perhaps you can up it $200 now, another $200 in 6 months and another $200 6 months after that.

[rj.phila]

thanks guys. im going to just lay my case out for them, and offer the option as well to take another tenant of their choice on, to potentially lighten the burden, so its not sounding like a complete ultimatum. (2 people in a 6bdrm 2 bath house is quite luxurious!)

[jpg7n16]

I would start with $2000 as a "fair, reasonable expectation" for them to pay (which really--it is!). If they can afford it and are agreeable to it, great. If not, you can negotiate downward from there, aiming perhaps to settle somewhere in the middle, between $1600-$1800.

IMO that's letting your niceness keep you out of profits you deserve.

If the home could legitimately rent for $2500 or so, start there and negotiate back. Don't start at $3000 and hope for $2500. And don't start at $2k, and work down.


I think this strategy ending in 1600-1800 range may be too nice and not enough fair value.

Unless the fair rental value is $2k, then it's a great strategy.

Oh well, just my opinion

[shanecurran]

You said friends of a friend, which I think makes it easier. Even if they were friends, business is business. You should throw out the altruistic aspects of the decision: think about it from a selfish point of view. How much per month is it worth to you to have renters that you know will not trash the place and may be more permanent? Is it worth $1300 per month? I find this impossible to justify. Is it worth $1000 per month, $500, $300? This is something you have to decide. Personally I would think it would be somewhere in the $200-$500 range. Even at $200 per month , that is $2400 a year (not including time value of money)