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Strategy Saturday
SS39: How Do You Raise Rents?
September 13, 2021
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SS39: How Do You Raise Rents?

Charles discusses the best ways to raise rents while keeping your tenants.

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Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing how do you raise rents? Raising rents, especially in multi-family is always a touchy subject. You have people that are buying properties. They want to value, add the properties, add value, add income to the property in order to boost the net operating income and also the value of the property. And they feel by buying a property with undermarket rents, they are able to do that by just simply raising rents well buying properties under market rents is a fantastic strategy for making money in commercial real estate and commercial multifamily real estate. But it’s not as easy as you think to increase rents. First off, I think you have to figure out what your goal is with the tenant. With that apartment. Some people raise rents because they don’t want to renew the lease and they feel this is a way of getting the people out, which it could be, but it also could be that you’re getting them for another 12 months.

Charles:
The other way of doing it. Some people think, well, I’m 10% under market. Maybe I just go, you know, I want to do it to 10%, but I want to keep the tenant depending on the market. You’re in, depending on how much that is per month, you might not keep that good tenant. So it’s a very, I think per case basis, type of decision and process for getting an increase in rent, but in this situation, really trying to keep your tenant as well. Like the best of both worlds. So getting long-term leases in place at a slightly, slightly higher rate is an alternative to, you know, getting annual rent increases. And this is mostly with commercial where you’ll have those rent increases already done in the, in the leases. And you’ll say every, every year it goes up 3% or 5%, whatever it might be.

Charles:
And at that point, it makes it easier where you don’t have to have this conversation for another five years. Now, when you’re doing leases over a year in most states, you require it’s a whole different process than one-year leases. I don’t suggest for multifamily that you’re getting more than one year leases because you need a witness and all this stuff in most states speak to your attorney before you make your decision. But just my thoughts on that when you’re doing these annual rent increases, though, I try to keep it under 5% in most situations, even if, say, for example, I’m renting a property right now to a tenant for a thousand and they have a renewal coming up, markets 1100 probably go up to 10 50 on that. Th if it’s a good tenant and I want to keep the tenant, because going up 5%, you’re most likely going to hold on to that tenant.

Charles:
You start going 10% or higher. You’re going to have a tenant. That’s now going to be looking somewhere else for housing. Now, if you want to renovate that apartment and put it back out for a renovated rent, maybe of 1200 in that neighborhood, well, this might be part of your business plan, but if it’s not, and you’re just trying to keep them in the unit it’s already been renovated, or it doesn’t require renovation, or you’re not renovating it at this time, I would try to keep those rent increases at a little overinflation a little over what the market’s doing, but not the full market increase. So if you bought a property and rents are, like I said, the market’s at 1100, you bought the property at nine 50. You have a lot of people. They’ll email me and tell me, oh, I’ll just raise it to 1100.

Charles:
Well, you’re probably not going to have any tenants stay there with that rent increase or a very small percentage of people stay. What you really want to do is, or what I would do nine 50, maybe to a thousand, maybe to 10 25 and a, and then try to make up the rest next time. And you can then catch up with the market by increasing it a little over market increases in your area and a of rent. And that way you’re writing it, but you’re also keeping the people in the property. Now you want to implement property upgrades along with a rent increase. This is another way of easing the rent increase out your tenants. So you’re paving the way with good relations between the landlord, you flash manager and the tenant. Now, what we’re doing here is minimizing turnover and turnover is where landlords often lose the most money in both time and labor and headaches, because you might say, well, I’ll just lose it for two weeks or a month.

Charles:
Well, you’ll lose it for that month. Then you’re going to have some make ready is what we call it, preparing that unit for the next tenants, that’s going to cost money. So you might even, if you can get the people out, do the make ready and get it rented. Within 30 days, you might still lose two months of rent, one month of actual rent loss. And one month of work that you did to the unit, that’s a huge amount. That’s 16, 17% of your, the the gross income potential on that unit is gone because you want it to grab an extra 5% or 4%. Whereas if you figure it out exactly where you can move it to without an issue that would be a much better plan. I say, keep annual rent increases under 5% or add 5% and make sure that when you have these incremental increases to achieve your desired effect of keeping the tenant in while also receiving additional rent.

Charles:
Now, when you’re implementing property upgrades, along with rent increases, this is a huge thing. And this doesn’t have to be, there’s not a set way of doing this. I mean, the best way of doing this is if you have a business plan of what you want to do to a property, to work that business plan, as you’re raising rents, you buy a property in January, you start doing work to the property, you know, that it needs additional parking and you have some land there you’re going to pave, or you’re going to gravel for additional parking, okay. Start doing that. There’s not enough lighting on the property. Okay. The month after start doing that, and you see these incremental work and that you’re implementing on the property little by little, it doesn’t have to be all done day one. And it’s also when you’re in that property and you start seeing, oh, I really like the light and people will come up to you and tell you, I’ve had people be forcing.

Charles:
Thank you. So for doing this, it’s much easier to park your at one property before without good parking. And I did that. And when the rent increases, everybody stayed, there was no issues same way with every property. Usually when I purchase it, there’s always a lack of lighting. I always find a properties, especially C-Class properties. So when you’re going through the properties, that might be something that you add additional light, and these are all one-time expenses. I mean, it doesn’t take more work to manage lighting for the most part. Okay. You know, changing a bulb. These are like ten-year bulbs. They usually are 10,000 hour bulbs that you put into these things at some point it, there’s no ongoing maintenance. You’re literally having a efficient lighting source over parking lots over stairways. Another great way of doing it. You can update and clean the common areas more often that could, that’s going to cost more money, additionally.

Charles:
But it might be something you do once a month. It might be something that it needs to be painted. Hallways need to be painting these things. Don’t really add to the rent directly, but your tenants will see it and they will stay if they feel that values, that they have additional value from the property and they’ll pay for it. I mean, if you have a three family house and you’re raising rents $50 a floor, and you spent a $250 or $300 on lights, I mean, you’re getting your money back. And only in a couple of months, it’s a huge gain. There’s also other things too. I mean, in older properties and some larger properties, you’re going to have what they call security systems or fire alarm systems. And these are becoming more and more required by municipalities. Add that in. That’s going to be something where you see it and it’s, they don’t have to know that it’s required from the state.

Charles:
You just say, Hey, we’re doing work to this property, we’ve done this. You can also drop notes. You can also communicate with the tenants, with your good relationships and let them know with your intentions for the property. I’ve had people move in before and say, listen, we’re moving, you’re moving in in three months, we’re going to be changing this whole heating, cooling element that you have here in your property, right? This AC unit is going to be changed. This furnace is going to be changed. We’re going to change out these windows and then you make sure that you follow through with it. But when they see that that’s gonna be something too. You can also tell the tenant beforehand that you’re going to be making changes before we, when you’re renting to them. And some people will ask why you’re not doing it at that time.

Charles:
Some people might ask later, but it could be something that, Hey, in the next six months, we’re going to do this. And that’s definitely a great way when you’re dealing with smaller properties, especially your first properties, where you might not have all this cash up front for all these changes. And then just keeping in contact and keep the the friendly communication via phone and texts much more open for your tenants. And that’s great if you’re self managing it. If you have a third party management company, that’s gonna be a little bit more difficult. But if you’re self managing it, you have this text communication with your tenants, letting them know, Hey, we just did this to the property, or, Hey, we’re doing this drop off letters. Hey, we’re doing work to it. The consistency, you or your managers at the property, it changes that whole persona that, Hey, this landlord just wants my money to haze a nice dye and he’s cleaning up the place and all this.

Charles:
And that’s not, you’re not gonna be able to make everybody happy, but it just going to make, you’re trying to ease the tension really when you’re raising rents and that’s really about doing work at the property show people you’re doing work consistently, even if it’s small things that keep on seeing you at the property, right? The last owner, there was trash in the yard or something like this. There was always hedges that he never caught. Well, now I’m having my LAN my lawn guy go out. And when he Moe’s, every other week, he trims like the last guy twice a year, he trimmed and these little changes make it more so that people are gonna have more pride where they’re living. So they’re gonna take better care of your property. But also when that rent increase comes around, you, it’s going to make it a much easier conversation.

Charles:
And there might not be a conversation. The other thing too, is that when you’re making these rent increases, let them know what the market is. You know, let them know, Hey, we’re putting you at 10 50, just to let you know, next door is for rent at 1125. And it’s a higher floor than yours is. And these are things that people might not be aware of. If you’re living in an apartment and you’re happy there, you might not be looking for another apartment. You might not know the market rents. And that’s something that just lets, you know, we’re about $75 a month under this, but we’re making them cause we’re going to continue doing work at the property. We’re going to paint this. We’re going to do this. And then they might come to you with some, a couple of requirements. They might ask you to paint something.

Charles:
If they’d been there for a couple of years, they might ask you for paint. If they want to do it themselves, I’ve had tend to ask me for paint, the paint, thrown apartments, perfectly fine. Any day of the week, I can draw, I’ll draw, puff, paint to your apartment. So you can point paint my unit. Thank you very much. They might have an issue with a toilet. Anything like this? It’s the, the main thing is that when I’m renting apartments, when I was self-funding properties and I’m renting them, I let them know from the beginning, give them a little cover sheet on top of their lease with all the main factors. Cause no, one’s going to probably read this a 10 year, a 10 page, 15 page lease and you let them know all the factors, Hey, this is what LiFi is.

Charles:
Hey, this is what it is. I’m waiting for them to slip up and not pay me rent on time. And I can say, listen, I’ll let this one go. Everything’s fine. And it kind of builds that commodity where you’re like, where you have this a relationship with them where, Hey, this guy’s pretty easy going and what’s happening here. But on the second time, I’m going to put my foot down and make sure that they pay rent on time. It’s the same thing when you’re raising, when you’re raising rents and you’re doing work at the property for goals. When you bought a property, it’s at 900, your goal is and markets at 10 50. And I wouldn’t raise all the way unless you have problem pendants there, raise it. But usually I would just not renew their lease and have them move out.

Charles:
That might be a more efficient way of doing it. And then when you re rent it cause if someone moves out on that 5% rent increase, when you rent it, you’re not going to rent it at the 5% rent increase. No you’re going to rent it at the full rent increase. If you bought at nine 50 markets, 1100 go right to 1100, go right to 10 75. Don’t but you know, don’t, you don’t have to, you the, the minor rent increase, the partial rent increase is when you have good tenants and any good manager. If your property management company should have rent increases new leases every year, you shouldn’t be letting people write out on month to month. So your property managers are you every time that’s coming up, have them sign a new lease. They are aware they’re looking forward to not positively, no one wants to pay more money, but they know, Hey, it’s normal.

Charles:
It’s a new year. I’m going to pay more in rent. And even if you’re in a market, that’s pretty cashflow and there’s not that much appreciation rent you know, add two to 3% of the rent and make sure you know what the market is obviously, but good tenants. You can do a partial rent increase. And when they move out, if they ever do move out, that’s when you can capture the full, the full increase when you’re doing heavy value. As you’re doing a lot of work to a unit and try to run for a higher price, that’s when you’re going to have the person move out. And obviously that if you’re raising rents a 25, 30% between jobs, I’m like this, they’re probably not staying at the property. If they want, you can tell them, listen, if you want to, we’ll do over this unit first and you can move into it. But most people it’s completely different when you’re going from $1,100 to $1,400 or 1200 to 1700. I mean, it’s completely different really bracket, income bracket and person. That’s going to be renting that unit. You’re really changing the whole demographics of the whole property and the whole tenant structure. So just to keep that in mind, I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar LLC exclusively.

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