How Landlords & Real Estate Investors Should Think About Rent Raises.

Don’t Raise The Rent: Avoid Short Term Gains At Expense Of Long Term Security

Rent Prices Are Skyrocketing, But Don’t Take The Bait

You’re in the real estate game and you’re savvy enough to end up here, so you’ re well aware that the real estate market is as wild and crazy as it’s ever been. As The Atlantic’s Derek Thompson recently wrote, home prices are at record highs; inventory is at a record low; the percentage of homes selling above asking price is at a record high; and the average time a property is on the market has never been lower . As prices soar and sellers take advantage of the mismatched supply and demand, it’s only natural for multi-unit property owners to consider raising rents.

[ Learn More: How to Play The Game When Supply Is So Low And Prices Are So High ]

At first glance it looks like a simple way to maximize income...but as The Property Management Authority® we don’t believe in pursuing first glances. When it comes to advising our clients, Nexus Property Management® offices across New England maintain focus on the principles that have helped separate us from the competition: in this case, keeping your eye on the long term.

Any successful investor should be focused on high tenant retention by ensuring a hassle-free experience for tenants while maintaining steady passive income for the property owner. In short, that’s the name of the game: the not so “secret sauce”. Would raising rent lead to short term gains? Very likely indeed...but at what expense?

MARKET COMPARISON:

Just to make sure we’re all on the same page, we’ll use a typical Nexus managed property in Woonsocket, RI as a calibration tool. Eight years ago this 2 bedroom unit went for $550/month. Today the tenant is paying $1250! The market has moved considerably and renting for $550 is not what we’re talking about. Rents should increase periodically, especially after tenants have left and your maintenance team has added value to the unit. Working with a property manager, who knows the ins and outs of rental prices across the area is an easy way to best gauge the market.

IF THE MARKET IS UP, WHY SHOULDN’T I GET MY PIECE OF THE PIE???

What we are advising against is gouging the tenants because you think the market will allow it. Hey maybe it will, for some time, but ultimately you’re adding financial stress at a stressful time for most renters and subsequently jeopardizing your goal of long-term tenancy. It’s simply not the right thing to do. It’s also bad business. But we’re seeing lots of owners trying to make up for lost monies from last year by going this route. As we see it...

There are THREE LIKELY OUTCOMES:

You get more money! Success!!! The renter is able to pay the higher rent and you close the gap or increase your profits. At the same time, you’ve soured whatever relationship existed. Get ready for increased maintenance requests and increased hassle. The truth of the matter is this: all purchasers (no matter what they’re spending money on) expect value equal to what they’re paying. If they’re paying more and they can’t see any reason why (no added value), expect even the most loyal tenant to start trying to get more bang for their buck. Hopefully the increased rent covers the expenses that are sure to come.

The tenant leaves: they can keep up for a short time but know that long-term they need to find a more affordable place to live. You’ve made more money early on, but now you’ve got to fill a unit at a time when many people can’t afford it or think they can due to temporary government relief or assistance. Hopefully the previous tenant didn’t take the rent hike personally and there’s not too much maintenance needed to get the unit ready for the next renter (You Have To Be Careful When Handling Security Deposits). Every week that unit is vacant is lost revenue. Even with a well oiled machine and a full rent-ready team, it can take a good month to fill a vacant unit during “normal” times.

Eviction: the tenant is simply unable to pay and you need to file for eviction...if your state allows it right now. Governments across the U.S. have added protections to renters over the last 16 months. Worse case scenario, the paying tenant you had is now a non-paying tenant...that you still have. Even if these government interventions have ended, state court systems are seriously backlogged and evictions can cost anywhere from $500 to $1500 depending on where you are. Once you finally get that tenant out, you’ve got the same issues as were outlined above in #2. Still think it’s worth it?

The point is this: in the end, there’s a good chance that this attempt to earn greater income upfront might be just as costly in the end. Be sure to have a long-term plan and focus before diving in.

[ Learn More: The Best Ways To Avoid A Painful Eviction ]

GREG’S PLAY:

Greg Rice is Nexus’ Vice President of Franchise Sales. Prior to working with Nexus, he owned zero properties. Greg now owns 100 units and is constantly driving the conversation about best practices in real estate across Rhode Island and Massachusetts.

When asked about raising rent during this climate his advice was simple: “keep rent slightly below market”...that’s the best way to ensure long-term tenancy. He believes in providing value at a discounted cost (think Wal-Mart), especially when the real estate market doesn’t necessarily mirror the economic reality of most renters. Owners obviously have their mortgages, taxes, insurance, and other expenses that need to be covered, but in his eyes, maintaining a smaller and more consistent passive income stream is much more important than trying to maximize profits in the short term. Value matters, trust matters, and if your eye isn’t on the long term you’re introducing unnecessary risk into the game.

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