How Does the Real Estate Investor Approach Rent Increases?

Posted @ 5:54 pm - Filed under Cash Flow, Communication, Investment Lessons, Palo Alto, RE Investment Practice, San Diego Property Owners, Texas

You might be wondering why anyone would even have rent increases on their menu these days. Fair enough. But there are regions in which the future will indeed include rising rents — in fact the last 12 months have seen rents head northward for the folks who’ve invested in the Texas neighborhoods I’ve recommended. It’s been roughly 2-4% in our real life/real time experience there. Just food for thought.

My decades as a real estate investment broker have led me to understand how landlords can rationalize just about anything, especially when it comes to direct dealings with their tenants. This is a good time to recommend professional management, as my stance has always been that your income property should work for you, not you for it. It’s not always feasible, and I get that, but if it’s at all possible, at least consider it seriously.

The question is often posed, “Should I always be on the cutting edge of market rents?” OR “What will happen if I raise my rents and they all move out?” There are myriad iterations.

Here’s a dirty little secret about where you should be with rents on your particular property — it’s not just about the ‘market’, it’s about your micro-market relative to the demand for what you have to offer.

Don’t be too quick to judge that statement as simple-minded. Take it while blending it into the context of what I’ve termed ‘relative demand’.

Let’s not turn this into rocket science, OK? If you own residential income property in a more or less blue collar area, the demand for your vacancies will not be as intense as a vacancy in a highly coveted location a couple miles away, whose tenant profile is more financially established than yours.

For instance, one of the neighborhoods we recommend in Texas (DFW MetroPlex) resides in a school district so well thought of, folks literally relocate so their kids can attend school there. Same as with Palo Alto (Bay Area, CA) schools, except ya don’t hafta make a 5-figure monthly salary. Landlords inside that school district are kings. Even in times like these, they not only fill vacancies, they sometimes see rent increases as an option.

Here are some guidelines to use when contemplating rent increases. Understand, most of the time, you’ve thought about it only cuz you already know about the competition down the street, right? Right.

Understand the real underlying demand for your unit.

Consider giving a 60 rather than a 30 day notice — courtesy.

Don’t get comfy with rents more than 10% below market, as it affects value.

Never raise rent on a poorly maintained unit — never ever.

If possible, preempt tenant resistance with evidence of local rents.

Understand: A long term tenant at way below market rent is a loss even if they’re ‘really, really nice’ people.

Ultimately rents determine value — keep your eye on the ball.

Do your own ‘boots on the ground’ rent survey. This ain’t an option.

This isn’t meant to be a treatise on rents. You set the tone on the topic when folks move in. When Brown and Brown had a management arm we told them our policy, which was to review rents either annually or even semi-annually depending upon current market trends. They went in knowing this would happen, so were never surprised.

Also, cuz we were very vigilant about maintenance and repairs, there was a well established positive atmosphere when it came to our side of the table. They appreciated our reliably quick response to the irritating little problems that crop up. It’s like banking goodwill.

When they check out your competition they arrive at a few conclusions.

The new, higher rent is equal to or a bit under what they found.

Even if they found a slight better deal, it very likely won’t be worth the irritation/cost of a move.

They have no idea if the new landlord will be as cool as you’ve been.

It’s about you giving them value for their money. As long as they perceive that’s the reality, the occasional rent increase shouldn’t be a big deal. Make sense?

Call me at 619 889-7100 and let’s get a Purposeful Plan up and goin’ for you. Have a good one.

This entry was posted on Tuesday, December 1st, 2009 at 5:54 pm and is filed under Cash Flow, Communication, Investment Lessons, Palo Alto, RE Investment Practice, San Diego Property Owners, Texas. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

11 comments to “How Does the Real Estate Investor Approach Rent Increases?”

Robert Coté on December 2nd, 2009 at 10:30 am said:

Back when I was a landlord I would give September notice of December increases. These were always in writing and included that these increases would only come in September and always included an accounting of the tax increases incurred since the last increase. I only ever raised rents on an existing tenant on consecutive years once. She was a pig and needed to be pushed out. As an incentive I also used to tell new tenants that they were paying at the higher end in anticipation of our not needing to raise rents. That was an awesome bit of leverage as after two years of no increases they always became very cooperative tenants.

BawldGuy on December 2nd, 2009 at 10:46 am said:

Couldn’t have put it any better.

Another Investor on December 2nd, 2009 at 2:30 pm said:

I like to start at 2 to 5 percent below accurately determined market rent, depending on the strength of the rental market. That way I get a number of interested qualified renters. I raise rents slowly and I keep them at the low end of the market range. Tenants stay longer with this approach. Fewer move-outs translate into lower vacancies and higher income.

I agree on addressing maintenance issues, although it’s difficult to convince property managers you want to do this. Most seem to follow the “ignore the tenant until they threaten to move” policy, because that’s what most landlords prefer and it’s less work for the manager.

BawldGuy on December 2nd, 2009 at 3:36 pm said:

Hey AI — Good managers are harder to find than most related pro service providers. When we find ‘em though, they’re golden.

I’ve taken your pricing approach before, but only in areas or markets tending towards either massive or superior competition. Otherwise, I like to be near the top — though usually not the leader.

Joshua on December 2nd, 2009 at 6:13 pm said:

Short answer: It depends. Be a good landlord, provide data to the tenant on why your raising the rents, and set expectations early on in the relationship.

Would have been a much shorter post that way, LOL.