Should You Immediately Raise Rent That’s Too Low?
It Comes Down To Money and Morality:
FRAMING THE SITUATION:
There are many times when raising rent is not the best solution to your problems. Don’t raise rent for the sake of short-term gains or to recoup lost monies to make up for some other expense. It’s not the right thing to do and it’s a poor play over the long term, which is most important for real estate investment. Your main focus to succeed property ownership is typically to ensure long-term tenancy. But often we at Nexus Property Management® get calls or questions from clients who have just bought new investment properties and the rents they inherited are substantially below market value.
[ Learn More: Landlords Getting Below Market Rents Without Knowing It ].
This scenario can be a little tricky, very uncomfortable, and inevitably leads to a tough decision on your part. Remember: there’s a reason the previous owner sold to you and it’s very likely that insufficient rent collection on his/her part was a piece of the puzzle. When making the decision that is best for you and your situation, think of it in terms of two factors: Money and Morality.
FACTOR 1: MONEY
You invested in real estate to make money. It is a business venture and like any business decision raising rent should come down to the math. In short, can you afford to raise the rent if it leads to 1) the tenants moving out or 2) the tenants needing to be evicted for inability to pay. If the unit is vacant for a couple months, can you still pay your bills? Do you have the money to add value to the unit through necessary maintenance work and potential upgrades? [ Learn More: Maximize Return and Attract Quality Tenants During Turnover ]
Can you absorb the short term hit you’ll take for the sake of long term gains?...If you can, then this might be the right avenue to pursue. The other piece of the money puzzle is anticipating eviction costs. There is variance from state to state, but on average the legal costs for evictions run around $1000 per case. Compare all of these potential expenses with what you expect to gain from the new rent once you have paying tenants and the numbers should provide you with part one of your answer.
[ Learn More: How To Evict A Tenant (In Rhode Island) ]
FACTOR 2: MORALITY
If you can make the numbers work that’s great because ultimately you’re looking to maximize your return on investment. However, there is another important component because your business revolves around the lives of other people. Put simply, can you sleep well at night knowing that you may force a family out of their home? This is a question no one can answer for you. At Nexus, we do our best to try to have interests align as often as possible, and we’re very good at it. But, inheriting tenants from a previous owner throws a wrinkle into the system. Had we managed the property, we never would’ve allowed this situation to develop. The tenants are in a tough situation where they’ve benefited from artificially low rents and they feel they might be able to afford an apartment that the market indicates they really can’t. Is it your responsibility to continue to provide these people a safety net that someone else created which takes directly from your business model? Investing in real estate is supposed to create passive income and hiring a property manager reduces your risk significantly, but from time to time you still do need to make tough decisions.
[ Learn More: 5 Steps To Follow After You Close On A Property ]
THE EXPERIENCE-BASED BEST ANSWER:
Much of what makes hiring a franchised property management company so beneficial is your ability to learn from their vast experience. While you as a property owner think about your tenants as individuals, when seen as just a couple of our 2000+ tenants, it’s easier for us to provide advice based on experience rather than emotion. We’ve seen owners get burned by tenants who: refuse to pay rent at all; who move out without letting anyone know; who purposely destroy apartments on their way out…the list goes on. When we see things like this happen, it is a reminder that while extending courtesy can make us feel better about making generous decisions, it is necessary to be fair but firm when managing your investment. In the world of priorities, you’ve likely gotten involved in real estate investment for the sake of turning a profit. Ideally, you’ll be able to do this in a way that does not introduce stress to others, but when rents are well below market you may need to consider your own financial stress first...again, the previous owner (who set these low rents) did decide to sell for a reason.
THE FINAL CHOICE...IS ALWAYS YOURS:
The beauty of real estate investment is that the final decision is always yours. It’s your show and you can follow whichever (law-abiding) policies and procedures you choose. If you haven’t been burned by a tenant yet and wish to give them the benefit of the doubt, you can go that route. If you see this primarily as the business transaction that it is, much like that between yourself and your lender, that can cement your decision as well. If there is a $300 gap between what the rent is and what the market indicates it should be, you may be paying $300/month for peace of mind if that is something of great value to you. If there’s a number somewhere in the middle for you, maybe that works. Ultimately, it is 100% your choice. We hope this breakdown of variables and options helps in your decision making process.
To find out more or to extend any specific questions you still might have, contact Greg and our team at Nexus today. If you’re interested in learning more about our growing franchise and franchise opportunities you can reach us here.
[ Learn More: Why You Shouldn’t Rent To Family Or Friends ]
Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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