by Howard Bell
According to the research firm Reis, 58 of the 79 markets they track are showing negative rent growth led by declines in New York at 1.9%; Miami with a decline of 1.8%; and San Bernardino, Calif., down 1.4%.
Based on market conditions, even strong markets like San Francisco can expect continued softness in rent rates and increasing vacancy rates.
Rent rates are important. You can call them cash flow, cap rates or GRM, but they are the best, most sensible way to price an income property.
Showing a consistently low vacancy rate is the very definition of less risk.
How to Rent Your Property Faster
Determining the Right Rent
A rental price that is below market may rent very quickly and now you are receiving less income for the length of the leases. In a rent control environment you may suffer from that below market mistake for many years because now your future increases are based on a lower base.
If your price is too high then you may wait one to three or more months before you finally succumb to accepting a lower market rate. If it takes three months for reality to dictate, you have effectively given up 25% of your annual rental income on that unit. Hardly worth waiting for your best price.
Finally, The sale price of a property can be measured in a variety of ways. The Gross Rent Multiplier or GRM uses income (rent) to arrive at value. For example, If similar properties, in your area is selling for a GRM of 10 and you have under-estimated the rent by $100.00 or $1,200.00 annually. GRM methodology would suggest that you have reduced the immediate sale price of the property by 10 x $1,200.00 or $12,000.00. Always rent and manage with one eye towards marketability.
Pricing the Unit
Leasing agents lack bench marks. Real estate agents have the MLS. Owners still have to determine the marketplace for rent rates. So….you have to be creative. I like to use two sites to find an approximate comp. It’s good to use more than one source to measure the market. Craig’s list is very helpful, so is apartment.com. With these tools, you can approximate local comparable rates by searching for similar size units in your area. Then, if you like, you can drive by or call to get a better sense of the amenities available. Price your vacancy accordingly.
Managing Rents in a Rent Controlled Environment
In San Francisco as well as many other cities, rent increase are mandated for many owners. The rent board determines the annual allowable rent increase – this year its 2.2%. If you have to reduce rent by $100 to rent your vacancy, consider how long it would take to recoup that loss, if your base rent was $1,500 now lowered to $1400. At $1,400, assuming maximum annual increase of 2.2% it might take you four years to get back to a base rent of $1,500.
Keeping the higher base rent in tough times
1. Keep the rent at $1,500, but offer gift certificates or other amenities. A rent reduction to $1,400 is a $1,200 annual loss. Perhaps an offer of a new notepad from Assus ($350) is attractive. If this worked, you would have kept your base rent at $1,500 and saved $1,150 this year and in forward years.
2. Offer one month’s free rent. Never make this the first month, since you may find yourself with a tenant that doesn’t pay in the second month either and now you have a squatter. Tenants are open to this and it allows you to preserve your base rent.
3. Increase your market depth by considering pets. You can reduce risk by asking for a pet deposit in addition to the security deposit. Be sure not to exceed 2 x rent for unfurnished or 3 x rent for furnished rooms.
4. A really great idea is to offer amenities that improve or increase the value of the unit. Amenities that tenants can’t take with them such as: stackable washer/dryers or microwaves, or dishwashers. Tenants really do like the added convenience and it adds value to the unit. A good win-win choice.
5. Section 8 housing credits. Many in San Francisco don’t accept section 8 prospects because of the extra paper work. It requires an additional layer of rules and contracts.
6. Maximize your marketing presence by using Craig’s List and an Internet listing company such as apartments.com.
7. Consider hiring a property management company to do the leasing for you. If it saved you just one month because of their expertise or visibility, you would be ahead of the game.
Howard Bell PFP CCRM is the founder/editor of Your Property Path.com, featuring over 450 articles on property management, Your Property Path SF, trade talk for the San Francisco real estate industry, Your Property Path News Brief, snap news updates and real estate market info, and Your Property Path Amazon Store. Howard is a property manager in San Francisco and holds a certification in financial planning.
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See our feature, How to Offer Tenant Incentives.
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