Are you coming into a lease renewal for your tenant? California has a maximum rent increase based on CPI. Currently, the equation is 5% plus CPI, but not to exceed 10% total. With inflation being so high, most landlords can increase rent by as much as 10%.
However, if you have had a tenant for in excess of 5 years, your rent might be significantly below market. For example, I have clients who have had the same tenant for 10 years. Because of the significant growth that has happened related to the pandemic, 10% year over year rent increases will not be able to bring this particular tenant anywhere near market as he's about 30% below market. As a landlord, what are your options?
One, keep the tenant and just slowly try to increase rent year over year in the hopes that you can eventually get to market. However, that game plan isn't any different than the current agenda and doesn't change the predicament.
The other solution is to give the tenant notice saying that we will remodel the property in order to bring rent up to market. Although, you do need to pay the tenant their last month of rent, it might be worth it to get rent up to market. Obviously there is an equation to calculate at what point this is the right decision, but it very well could be that it is reasonable to expect to have some forced turnover once every x number of years.
I think the math that my clients are doing is can they get their money back within a year including vacancy? It might be the reasonable over under from the standpoint that tenants typically sign a lease for a year and ideally commit to a whole year. In addition, the following year affords the opportunity to have a new baseline of rent and rent increases. This is certainly one way to approach rent increases and tenants who may be below market.
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