Raising Rent...

Raising Rent involves a lot of variables, and a lot of emotion. At Patriot Properties we always try to raise rents between a range of 3-5% per year for all our clients. It is our duty to our clients to ensure we are setting their investment up for success, and this means out pacing inflation and increasing their NOIs.

Cash Flow is the holy grail of investing, and as such is something we focus on intensely at Patriot Properties. Expenses can only be cut so far to ensure the property is still being maintained at a satisfactory level, which means the only other place to increase the NOI is by raising rents.

Working with tenants while raising rents is always emotional.

Calculating a reasonable rental rate for your market is not as complicated as it may seem. If you’re a smaller investor with only a couple of units it is difficult to have much of an impact or influence on market rates, which means your best bet is to find comparable properties and base your rents on the rates that those properties are renting at. If you have the ability to influence the market though, it is important to know where to reasonably and responsibly set market rents.

Industry wide it is common to qualify tenants by requiring they make 3x the rent you’re asking for the unit. This means the rent is correlated with the income of the people within the area. If you can find out what the average income is for your area, and the demographics of those earners, you can easily derive a reasonable rate based on the target income range of your average tenant. For example, if the average income is $45,000, this means the average person can afford up to $1,250.

As I mentioned there are many variables to considered when making the assumption that the average person can afford up to $1250. It’s important to know how many renters versus homeowners are in the market. It’s also important to understand what type of property you’re managing. If you have a brand new, luxury apartment complex with numerous amenities, you’re going to be able to attract a higher level wage earner. Likewise, if you have a Class C property that needs some TLC you’re going to have to discount the rent to reflect this.

Typically we do not raise rents on current tenants more that the 3-5%, we usually try to make the largest increases upon turnovers.

We have been hired by clients that had below market rents that needed to increase their rents by over 20% on some of their tenants, and that was not an enjoyable situation. However it was a very eye opening and educational experience. Like I mentioned at the beginning, raising rent can be very emotional. The people of the building were all great tenants and they all took great pride in the building, unfortunately the manager prior to us did not raise rents at any rates higher than 1% per year, which put the owner of the building in a difficult spot.

Client Expectations & Value Add Opportunities

As promised from the closing of my last post, my topic for this post is establishing expectations for clients and recognizing and using value add opportunities.. I’ll touch on how I structure my management agreement to allow and budget for upkeep and improvement. As I mentioned last time, working with a client that won’t reinvest in his or her property is a complete waste of time. The management fee you receive won’t be worth the low quality tenants, and high volume of complaints associated with the lack of upkeep. It’s always important to remember your properties are your brand. The better all of your properties show the higher service you can deliver to all of your clients and tenants.

A word of caution to managers and investors, do not bend over backward to please a potential client, and do not work with a manager who is willing to bend to your every whim! I know this may sound counter intuitive, but as the old adage goes, “if it seems too good to be true, it must be.” There is probably a reason that your prospective manager is so willing to please you, and a large part of it is probably due to a lack of experience, structure, or over zealous ambition that is causing them to forgo their best interest in pursuit of growth.

Every manager should have a solid structure that they adhere to, and that they hold all of their properties to. Our company performs showings by checking keys out for vacant units in exchange for a drivers license or credit card as collateral. I’ve discussed our policies and practices with potential clients that were used to the traditional showings in which a leasing agent or a maintenance technician takes prospective tenants through the units. This particular client made that a sticking point where he wanted his properties to still be shown in the traditional way, which simply did not work with the way we operated, so we did not initially come to agreement and went our separate ways. As a manager you need to hold to your practices because otherwise you will end up in a situation with no organization and no structure.

Share your expectations, and establish boundaries and understandings at first contact. Remain confident in your practice, however always be receptive to new ideas, do not refuse your potential client the time they desire and deserve to discuss their viewpoints and opinions.