To Increase Rents Or Not To Increase Rents That Is The Question!
A Landlords Guide to Knowing when to Increase Rents
As owners of a property management firm and board members for a Southern California apartment association it is our job to follow the rental market trends and keep up to date with Southern California’s local rental market. As many of you already know, local rental rates are on the rise and the rental market is showing strong growth. We have many clients and association members asking us whether or not they should increase their existing residents’ rents at their properties and although at first glance the answer would appear to be an automatic “Yes!” we must first ask the question, “What are your short term and long term goals for your property?”
A recent study by USC’s Lusk Center for Real Estate projected that rents will climb 8.2% in Los Angeles County, 8.6% in Orange County and 9.9% in the Inland Empire all by mid-year 2016. This is a promising statistic for landlords all accross Southern California but you must understand the following points in regard to your own property before making any moves:
What is your goal for your property?
What is your property’s rental rate in relation to your micro-rental market?
In what condition is your property maintenance-wise?
What is the average length of stay for each individual tenant?
The reasoning behind knowing what your goals are for your property is so that you can make a decision to raise rents based on your core goals. If you are planning to sell your property in the near future then it is your job to set the new high standard for rental rates in your local micro-market.
Remember that for each $100 dollars you get in additional rent, you are adding approximately $25,000 dollars in added sales value based on a 4.8% cap rate. That is a significant increase of value. Imagine if you add $400 in additional monthly income, you can potentially be adding $100,000 in total value! The risk you are taking is a $100 dollar increase on any one tenant could result in a vacant unit, so knowing exactly what your goals are for your property are key in deciding whether or not to increase rents.
We know that based on our own studies that the average turn-over cost and vacancy wait time can cost a landlord upwards of $2,500 to $5,000 in lost income. So it would take you 4 years to recuperate $5,000 from your vacant unit all because of a $100 rent increase.
When you consider the financial recovery time, that $100 dollar increase doesn’t sound so inviting if you plan on keeping your property for the long haul and are just looking to increase our cash flow. So let’s dissect the four questions you must ask yourself before increasing your rents.
Question #1: What are your short and long terms goals for your property? This is the basis for understanding whether or not you should increase rents, and if so, how much you should you increase. It also helps you determine if you even have room to increase rents. If you are only a slightly below market, it may not be in your best interest to increase your rents.
Question #2: Where is your property’s rental rate in relation to your micro rental market? It is prudent that you complete a thorough rental rate market survey so that you know exactly what rental rents are on your block and the surrounding blocks, aka your micro-market. Just because rental rates are up in one area of Southern California doesn’t mean that they are up in your particular market. Remember that markets are driven by supply and demand, so if you’re doing a market survey and find many vacant units on the market perhaps increases are not for you. Rents can shift from block to block depending on the location and city!
Question #3: In what condition is your property maintenance-wise? This is where you as a landlord need to be really honest with yourself and be geniune as to the condition of your property both exterior and interior. If rents next door are a $100 more than your rents perhaps its because they are in better condition and/or have more ammenties than you have to offer, so be honest with your self when completting your market survey because this is where you will determine your value in the market.
Question #4: What is the average length of stay for each individual tenant? This is a very important question to ask yourself because if you have long term tenants it is typical that each unit will have deferred maintenance such as out of date/chipping paint, old/worn-out carpets, dated style cabinets, etc. The longer the resident has lived in your unit, the more maintenance and turnover cost you will incur should a tenant decide to vacate based on your increase. A rent increase just may be final factor that pushes your long term good paying tenant over the edge and may cause them to look elsewhere for a new fresh unit leaving you with the high turn over cost to bring your unit up to market value. Knowing the cost could range from $2,500 to $5,000 dollar range, you may want to reconsider your next rent increase.
Rent increases sometimes stir up unnecessary tenant frenzies and the slew of request for new carpets, blinds, appliances, etc. all because of a simple rent increase. Although that rent increase will not mean much in cash flow to you it may create an unhappy resident who may seek a better and newer product again leaving you with turnover cost and venturing into uncharted teritories with a new unknown tenant.
The key is to know your tenant profile and make decisions based on the immediate and local facts, not information you read in some trade magazine that may not apply to your micro-market.
You will hear us say time and time again, if you know your property and local market you can own it! Always do your research based on your goals for your property, take the time necessary to study your property, the surrounding micro-market and your tenant profile. When you decide whether or not rent increases are for the betterment of your property and your pocket book, you will be making proactive decisions instead of choices that will leave you reactive to the outcome of your increase.
We are not trying to scare you into not increasing your rents, however we are simply stating that you should make strategic rent increases that will benefit you and will put you one step closer to achieving your goals! If you are not sure whether or not increases are for you seek assistance from a professional and remember the tortoise won the race, it’s not how fast you get to the finish line as long as you win! Happy investing!
Brian and Vincent are “The Apartment Specialists”, owners of Lotus Property Services, Inc. and are active leaders and Real Estate Brokers in the apartment industry. Since introducing Lotus Property Services, Inc., the company now oversees a real estate portfolio of over $300+ million dollars in value which in part has been accomplished by Brian & Vincent’s commitment to quality and service. Together Brian & Vincent have sold and managed over one billion dollars in real estate assets. As former Presidents and Board members of apartment associations, frequent writers for numerous industry magazines, key note speakers for seminars and investment groups such as the Value Hound Academy, Brian and Vincent have earned the title as the undisputed “Apartment Specialists”.