Rent raise too big?

I’ve got some inherited tenants paying $150 lot rent in tenant-owned homes. Per the lease, I will be able to raise rents in the new year. My question is…the lot rent for all non-inherited tenants is $300, in line with the market. Should I increase rent to align with the other tenants in the community (big shock for the inherited tenants but will be fairer to the other tenants) or raise the rent $50 annually until it aligned with the rest of the community (easier for the inherited tenants but not as fair to the other tenants)

We brought a park from $110 to $325. Closed right before Christmas and gave out letters with a 1/1/20 $225, 6/1/20 $275, and 1/1/21 $325 notice. Felt like letting them know what our plans were upfront was best. Market rent was $325 and this was a super clean property. I think 3 out of 41 sold their home, but the homes stayed and new tenants went to $350. Also we own about 1,000 pads in that metro, so the residents knew we would be going up to market rent. A few of them admitted that they had a nice 10+ year ride at $100 rent, so they were ok with it. Maybe consider spreading it out over the year vs all at once so you stay out of the newspaper? $10 or $100 rent raise, you’re still going to get some complaints.

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In operating your business you make decisions based on what is best for the business not based on what may be “fair” to others. I would be raising the rents $50 annually until you reach market. This would be beneficial in easing inherited tenants into the real world and allow them sufficient time to adjust and avoid the possibility of non payment as a result of a full jump to market. Some might choose to move but where can they go that is less expensive.
You might get some comments from the higher paying tenants however it really isn’t any of their business how you correct the inequity.

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I would do it over time, maybe 12-24 months. That gives the people who can’t afford the market rate time to get their affairs in order. Telling a single old widow living on SS her lot rent is doubling in 30 days is not fair to her in my option. I would be clear about your intentions up front so it’s no secret and the people know what to expect long ahead of time.

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I would stage it in multiple raises, but more than $50. $50 dollar raises will take 2 years to reach $300, and at that point $300 may be to $350, so it will take a 3rd year to reach the new market. I think somewhere around $75 makes more sense. That will put you at $300 within 1 year.

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I have inherited tenants and 9 years ago when I bought the first park, I charged new tenants an extra $100 per month…nine years later I still have 30 tenants paying $575 and 54 paying $675…
crazy thing is that the inherited tenants are the ones who are the complainers, even though market rent
is closer to $775. no good deed goes unpunished

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Good idea to set up time term and cap rate matching the rest tenants rate, cheers

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Though I cannot envision lot rents of $775 (thats just absurd, I dont care where property is located!), I do agree with @GClement42. Its always the long term, inherited types who are the loudest complainers. Its like they are trapped in the past, and long for the “old guard” and their prices and style of management.

In my MHP, I’m a little more sensitive to raising LRs (a $100 bump all at once is most likely going to put hardship on vast majority of our clients).

That said, raising rents over time is inevitable. My approach is differentthan most. I take a hybrid approach where I marry profitability and market rents. If I am happy with the level of profitability, I dont need to aggressively push rents. I try not to get greedy. You dont always need to match the market rents dollar for dollar. For this particular MHP, my cap rate is 9.9%. I’m happy with this.

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In theory combining profitably with market is nice however business decisions need to be made without emotion. Business planning eliminates decisions based on emotions when the market determines profits and cap rate and removes some degree of stress. Simply desiring a comfortable profit is nice however reality is one must plan for the future to sell the property at the highest possible cap rate for retirement.

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DavidR, that’s great if you like that method, but you are exactly who we target as sellers. We look for owners who do not fully appreciate the need to keep up with market, we buy low, then we raise rents and increase park value tremendously.

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Think of all that money they saved for years and years. Like a bandaid, if it market, they will know it.
They will scream, and they will accept it as the options out there will be similar.

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Thanks for the reply everybody. I think I’m going to take notes from most of these comments. Raise the legacy $150 tenants $75 at the beginning of the year then the remaining $75 6 months later. Telling them what we will be doing and what the market rent is. Our cap rate is fine as is but I know if I ever wanted to refi the bank would frown at keeping some rents artificially low.

All really great feedback!

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