Maximizing Rents - Part 1 - What You See May Not Be What You Get

Like many parts of the county, the Boise area is seeing record high rents and low vacancies. Rents within our own management portfolio grew well over 10% on average this year. At some point, the rental market should stabilize. In the meantime, it is not unreasonable for landlords to want to maximize rents.

However, it is advisable that Landlords determine if their goals for the property are short or long term, and understand the potential costs and considerations needed to make the best decision. These costs and considerations are really important, but in part 1, I really want to address other factors that can miss-guide some landlords.

Over the next two blog posts, what we really try to communicate is that just because the media says rents are breaking records, doesn’t mean you should go raise rents to some inflated number.  Get the data, understand the pros and cons, and make a plan.

Rents

When it comes to rents, what you see may not be what you get.  So just because you see some amazing rent being reported at a property, don’t take it as the gospel.  Reported rents may not be market rents and market rents rarely are the effective rent.  Effective rent, for the purpose of this post is:  gross rent, less vacancy, less any rent concessions, and less some expenses related to rent. 

Don’t assume that properties within close proximity of another should get the same rent.  In fact, FRPM manages 4 plexes in a community with multiple owners and managers where the buildings are exactly the same, but some landlords have their tenants pay water and sewer in addition to electric and gas, where others do not.  Anyone making decisions without knowing the differences could really cause themselves some issues.

Also, don’t forget, a landlord and even other property managers that have zero to very limited tenant screening criteria tend to get higher rents but their effective rent tends to be much lower.

Concessions

Yes, even with record low vacancies, huge rent concessions still exist. A large rent concession can help a builder who is selling a newly constructed multi-family building in several ways.

1. Reduces the initial rent-up period, by reducing a tenant’s move-in costs and effective rent, 
2. The reported rents support the builder’s asking price, 
3. Reported rents are safeguarded when it comes time to renew.  Another example of rent concessions still occurring today are when filling vacancies near colleges in the middle of a semester.

Vacancy

Vacancy can affect perceived rents as well.   For example, some landlords are absolutely fine with an extended vacancy as long as they get the magic rent number.  So once again, the reported rent is not market rent and the effective rent could be 25% less than what is reported.

The cause of a vacancy will be one of the items on our list of considerations.  Vacancies can be the property owner’s largest expense when considering turnover costs, marketing, lost rent, and utility costs.  For these reasons, we recommend that our owners only consider maximizing rents for vacancies caused by force or by natural attrition.  Evictions and rehabs are examples of forced vacancies.  Examples of vacancies by natural attrition are:  tenant buys home, space requirements, or as the tenant’s needs change, such as location, budget, etc.  This now leaves us with vacancies caused by the landlord’s decision to legally change the terms of the lease, such as increasing the rent.   This really is the whole purpose of this blog series.  We want owners to determine their goals and understand the costs and other factors to consider before giving tenants notice to increase rents.