When to raise rent is a question many landlords ask themselves. Sometimes it comes up when a tenant leaves. Other times it comes up when a landlord gets an increase in taxes or insurance. Veteran investor and landlord Larry Arth takes on the issue here:
By Larry Arth
Rents have been increasing and it is a great time to be a landlord. In fact, landlords have been enjoying some of the fastest growth in rental rates in recent history. But you want to be aware there is a cap to that growth and we have begun to see this in some markets already.
Rental demand has continued to remain very strong, which allows landlords to be bullish on rental rates.
The questions investors are now asking about when to raise rent are:
- “How high can they go?”
- “For how long can we raise the rates?”
Great questions, and one needs to look deeper at the market in which you are investing to find the answers.
Rent growth declining in some areas
“While the national apartment market is still performing above the long-term average, the moderation from the unsustainable levels of 2014 and 2015 has come, as Axiometrics predicted,” Jay Denton, Axiometrics Senior Vice President of Analytics, said in a release in late September 2016. “In particular, rent growth has declined precipitously in markets with the highest rents in the country, such as New York and the San Francisco Bay Area.”
Remember local markets vary
I always enjoy looking at national numbers, as I believe they are helpful to determine an average or a benchmark against which to compare.
I do, however, always say there is no such thing as a national real estate market, as each market is local in nature and different in size, economic strength, percentage of renters to homeowners, etc.
As a landlord doing your diligence, you will always want to be aware that your research into this information is local in nature rather than based on national statistics. Too often I see this information being misinterpreted because of this. Diligence, of course, means nothing unless it is providing you accurate information.
7 things to know before you raise rent
You want to consider what is going on in your local rental market in order to know whether you can raise rent and what your rental future will look like.
No. 1 – What effect will the new presidency have on housing?
With the unprecedented presidential election year, and neither candidate talking about the housing market, many are uncertain what this may mean for the housing market?
Many suggest the feds will begin raising interest rates after the election. While some speculate this will slow the housing market, others believe it will spring people into action to hurry and buy before the rates go up too high.
My belief is it always boils down to consumer confidence. It may take a while for the dust to settle and consumers to feel comfortable with job security and job growth. Which is why I always suggest investing in those job growth markets before consumers are confident to buy such a large ticket item such as housing.
No. 2 – Your tenants other options
What is the probability that your tenants may choose to buy a house?
As consumer confidence rebounds some tenants may opt to buy a house and you always want to keep your thumb on the pulse of your tenant.
Based on your unit’s rental rate, can your tenant actually buy a house for about what they are paying for rent, if so you may want to know your tenants future desires? I found the best way to do this is to offer multi-year leases. Two-or three-year leases help to establish this and often are beneficial for both parties.
No. 3 – Affordability of the market
One of the first things you want to determine before you raise rent is your local affordability for housing. This can be obtained from an experienced local property management company or a Realtor. You can also find information on sites like HUD’s local housing portal to determine fair market rents for a particular area. Rents can only rise until affordability peaks and a great way to determine this is to establish the area’s median income. This may be subject to change after the election so if you think you already know this it is important to update this information annually.
Affordability based on national averages is when a monthly rent payment is around one-third of what the average person’s monthly gross income would be in that market. Once it gets beyond this point it may be getting too high. This is when apartment owners, managers and investors may experience vacancies and/or late rents suggesting that affordability has peaked. If you are evaluating property where you need high rents you may want to look deeper, as sustainability of cash flow may be threatened.
No. 4 – Know what your competitors are charging because your tenants know
An interesting thing happens when the rental market is hot. Landlords raise rent every time a unit becomes available. How easily we slip into complacency as landlords. We think this rise in rents will continue forever. Before you know it, the market takes a swing and suddenly it becomes harder to rent and as a landlord you wonder why.
Do what you know your tenants are doing. They shop the competition so you should be too. Here is a great tool to do just that, rentometer.com which will tell you what other homes have recently rented for in your area. Also, this cool tool is a great asset when buying property to make sure your anticipated rents are in line with the market.
No. 5 – Housing availability
While bigger cities tend to be building more houses and apartment complexes to help fulfill the needs of renters, this is not the case everywhere. Most local newspapers display building permit activity. I always suggest you watch this for insights before you raise rent. Talking to Realtors can also provide information.
No. 6 – Renter-to-population ratio
It goes without saying that markets with a higher ratio of renters are better safe havens for owners, managers and investors who have a larger pool of tenants from which to choose. This also puts the leverage in favor of the landlord.
Knowing your investment market’s renter ratio is important for all owners and investors to know. If you do not already know what your investment market ratios are, this information and chart from the National Multifamily Housing Council is a resource.
No. 7 – Directional swings
Many of these items are prone to swing in one direction or another. This untapped resource can give you a huge clue as to where the market is heading. Often the information is readily available but are you looking for it?
- For example No. 5, housing availability, how does this compare to a year ago? Is it becoming more or less available?
- Or No. 6, are more people opting to rent in your market? Or buy? As business owners it is paramount to know your numbers. Keep this information updated and compare the directional trends.
Summary: Pigs get fat, hogs get slaughtered
I always share this sentiment with owners, managers and investors who are looking to raise rents.
As a firm believer in maximizing profits, I like to raise rent each year even if it is just a few dollars because. Quite simply, I like to set the boundaries up front for the tenant to expect a rental increase at each anniversary date. This way they are not surprised or upset when it happens.
First and foremost, I look at what changes may have happened to my expenses and of course adjust rents accordingly. When the market will bear more, I believe each owner, manager or investor must decide what is best from a big-picture standpoint. As a business owner it is paramount to know your numbers such as in No. 7 – directional swings. Those who know their numbers, are able to make decisions about raising rent much more comfortably.
A larger increase in monthly rents may be warranted, as long as it does not inspire tenants to start to compare their current rents with the prospect of moving on for a better, lower rent. We all know how costly tenant turnover can be. This will quickly consume the increased rents that you may have obtained.
So to that tune, if you raise rent, remember: pigs get fat, and hogs may get slaughtered. Do your diligence, know your numbers and respond accordingly.
About the Author:
Larry Arth is the founder and CEO of Equity Builders Group, a Florida based Real Estate investment Group. As a landlord and 36-year veteran to real estate investing, Larry understands that we are now in a global economy and as times have changed, investment strategies must change as well. Larry is an international recognized consultant and speaker and assists hundreds of investors per year, both foreign and domestic to realize their investment potential. He analyzes locations across the country for economic strength and the locations that yield the largest most sustainable return on investment. He works with investors to ride the wave of each area-specific market surge. Larry’s primary focus is offering (Non Listed) safe and sustainable turnkey investments to the passive investor.