If you are one of smart Silicon Valley investors who is buying a rental property in Santa Cruz you may be buying one that has tenants in place. If that is the case it is very possible that the current tenants are not paying Santa Cruz market rental rates.
Current Santa Cruz rental market rates are at a very high level. It is common to get at least $1200 a bedroom and not unheard of to get $1600 a bedroom.
In my opinion, as a long term Silicon Valley/Santa Cruz real estate agent and Santa Cruz rental property investor myself it is sometimes better to keep the tenants in place with gradual rent increases than to give them a huge rental increase and risk having them move out.
The reason for this opinion is based on numbers, not just my hesitancy to put a good Santa Cruz tenant out onto the street.
When a Santa Cruz tenant moves out, especially if they have been there for 3 years or longer you will have to at a minimum paint and replace carpet. You may have to replace window coverings. You will have at best 2 weeks, and possibly a month of vacancy.
So let's take a scenario of a 2 bedroom rental property renting for $2000 a month that you think you can get $2800 a month for with Santa Cruz market rents.
If the current Santa Cruz tenants can't or don't want to pay $2800 a month here is what can happen:
1. 4 week vacancy: Lose $2000
2. New carpet: Spend $1500
3. New paint: Spend $3000
4. Replace old appliances: $3000
5. New window coverings: $1000
Money lost: $10,500
Increase rent by $800 a month for 1 year
Money gained: $9,600
So the first year you lose $900 if you did not raise the Santa Cruz rent at all. If the Santa Cruz tenant leaves after 1 year and no repairs are needed you can probably look at a 2 week vacancy. So you only lose $1900. You are in the hole. If the tenant stays the second year you will make an additional $9600 in rent so total gain is $8600 over 2 years and $18,200 over 3 years.
If you raise the Santa Cruz rent $100 a month every year for 3 years and you do not have to paint, carpet, or replace old appliance over 3 years you make an additional $7200 over 3 years plus the $10,500 you did not spend so $17,700 over 3 years. So, if this is a long term Santa Cruz tenant you are only $500 ahead in 3 years by removing the original tenant and replacing them at market rate.
In my opinion it is probably not worth it.
What if you are only $300 a month under Santa Cruz market rate? then it is really not worth it.
eXp Realty of California
Specializing in Probate, Trust, and Investment Properties