Why should you set rents $500 below their fair market value? Are your tenants more deserving of charity than, say, the Salvation Army?
If you are sure of that $500 number, and can document it, why not raise your rent to $100 under market? Some tenants may move out of spite, but that is fundamentally irrational, since they will incur moving costs plus likely pay more in rent.
To ease the shock, you might give tenants a three-months advance warning (assuming they are now renting month-to-month). This also gives them time to verify that your new rents are still under market levels.
You might also advise new tenants that your policy is to raise rents annually, but keep them slightly under market. That way you never get so far behind.
