With the cost of living on a steady incline and the demand for rental housing being pushed to an all-time high, it is inevitable that landlords will need to increase rents to keep up with market trends. This is great news for owners as increased rents equals more income and can mean an increase in property value. There are factors to take into consideration when increasing rent on a tenant. If done correctly, you will limit high turnover and keep vacancy rates low.
Before increasing rents, evaluate your local laws to ensure that raising rent is an option. Some areas with rent control may not allow such an option. Other areas may only allow a specific percentage increase. It is important to establish that you are compliant with all federal Fair Housing laws as well. This means not raising rent in any discriminatory manner. If you’re unsure of your local and state laws here is a great resource.
Inspect the leases in your portfolio. Since you cannot raise rent on a tenant who is currently in a lease, look for leases that are going to expire so that rent can be raised after the expiration. Having a report with lease every expiration is the foundation of successfully increasing rates. Having too many leases expire in any given month can hinder your ability to raise rents without taking a vacancy loss.
If you are unsure of current market rates for your area, start by shopping the competition. Talk to local property managers in your area and find out how strong the market is. Call a couple properties and ask for a quick market survey to research what similar units are renting for.
Once you have completed market research, observed your lease terms, and confirmed compliance with federal and local laws the next step is to inform the tenant. The most professional way to start is to send a written renewal notice within 30-90 days (depending on what your state requires). Using a form letter that is already prepared can save you time and keep things organized.
This is a terrific opportunity to communicate with your tenant about any maintenance needs that the tenant may have forgotten to inform you about. You can offer incentives to the resident to resign a lease by offering a basic carpeting cleaning or small upgrades to the unit. Not every resident is going to be happy about an increase in their rent. Making it more palatable to tenants by including a benefit to the tenant will encourage them to resign a lease.
Small raises with each lease renewal is a much easier process than a substantial increase all at once. This is the best practice to soften the process for the residents and ensure you keep vacancies low.
The process of raising rent can be overwhelming to some property managers. Finding a balance between raising rents and keeping both owner and tenant happy is the best way to ensure that everyone is happy. Knowing the best practices for this and staying organized ensure that you are successful.
In the face of moderating job growth…despite the massive amount of supply identified for delivery in 2017…even though several large metros are expected to remain in negative rent-growth territory…Axiometrics apartment market data is resulting in a forecast that shows annual effective rent growth in 2017 matching the long-term average.
The latest forecast estimates average rent growth of 2.3% this year, equaling the average rate from 1995-2016 and actually 10 basis points (bps) higher than the previous forecast’s estimate. This slight increase also comes in the wake of a predicted fall in the job-growth rate to 1.4%, with 2.01 million jobs added to the workforce in 2017.
With the slowing job-growth rate and with 404,761 new units identified for 2017 delivery, as of April 3, 2017, average rent growth remaining at the long-term average is a testament to the overall health of the national apartment market. While primary markets such as the San Francisco Bay Area, Houston and New York are expected to average flat to negative rent growth this year, strong smaller markets are taking up some of the slack, according to Axiometrics apartment data.
The scatterplot chart below depicts how the apartment market has changed in the past year. The green dots indicate markets in which the forecasted 2017 rent growth increased from the prediction of one year earlier; the red dots indicate metros where the forecast has been lowered. Except for Los Angeles, Atlanta and Seattle, the “green” metros are secondary markets that have shown a great deal of strength since the start of 2016 – such as Sacramento; Riverside, CA; Warren, MI; and Minneapolis-St. Paul.
Most of the primary markets are “red” – New York; Boston; Philadelphia; Washington, DC; Chicago; South Florida; Houston; and the Bay Area among them. As the chart shows, the largest positive change was 170 bps (in Sacramento), while the biggest negative change was 460 bps (San Jose). San Francisco, Oakland, Houston, Baltimore and New York also dropped by more than 200 bps.
In terms of the actual forecasted rent growth for Axiometrics’ top 120 markets, based on number of units and other factors, the biggest changes between forecasts came at either end of the scale. The previous forecast estimated that only two metros would achieve average rent growth of 4.0% or higher this year, only one market would be negative and 10 would range from 0-2%. The other 107 would gather in the 2-4% area.
The latest forecast, however, reduced that 2-4% cluster to 80 markets, still two-thirds of the total group. Some 14 markets are now expected to exceed 4.0% rent growth, while a total of 26 metros would fall below 2.0%, including six in negative territory.
As mentioned earlier, supply is a major factor in predicting how the nation and a market will perform, though not to the same extent as job growth. The 400,000-plus units identified for 2017 delivery represent the peak for the current apartment cycle, but the pace of construction won’t really start slowing down until the third quarter of 2018.
Axiometrics forecasts 319,541 units to come to market in 2018, and 295,521 in 2019. The supply levels are expected to tick up slightly in 2020 and 2021, but nowhere near the peaks of 2016 and 2017.
Other predictions for 2017 and beyond, based on Axiometrics’ latest forecast and apartment market research, include:
Investing in rental properties can add to an owner’s monthly cash flow and net worth. The strength of the day-to-day management of your properties has the biggest impact on the future value of your investment. From retaining residents to fielding work order requests, every action your property manager takes impacts your bottom line. Finding the right property management partner, is the crucial component in the long-term success of your portfolio.
With over 100 years combined experience, the team at Commercial Northwest provides excellent customer service for our owners, renters and investors. We currently manage around 850 multifamily units. Our portfolio stretches from Treasure Valley to Twins Falls and Eastern Oregon. Our team members are property owners themselves and understand how decisions can impact an owner’s return. Our very first clients are still our clients today, proving that our level of customer service and experience is worth its weight in gold.
From screening to the final move out, having experienced property managers in your corner can provide you with a list of great benefits; today we will highlight three of those benefits:
1. Protect and Grow
Can you talk about how marketing units before they come available to ensure little vacancy loss protects the owner from loss in rental income. Also, how tracking market rents and doing market surveys ensures that we are always obtaining the highest market rents for our clients. We know that the strength of the properties’s income statement determines the value of the property. Therefore, we take great care in protecting and growing that value.
2. High Quality Renters
Having a thorough screening process in imperative to finding quality renters who pay rent on time, renew their lease and generally put less wear and tear on the unit. Commercial Northwest puts our owners at ease by implementing a proven set of screening criteria that complies with all federal, state and local fair housing and civil rights laws.
3. We Are the Owner Advocate.
The team at Commercial Northwest acts as the point of contact for our owners. That means ensuring rent is collected on time, maintenance issues are handled in a timely, cost efficient manner and resident relations are handled. We work to maintain a positive relationship with current residents. Our aim is that residents renew their residency at our properties; which reduces vacancy loss and turnover expense for our owners.
Peace of mind is important to owners. Knowing the time, effort and resources needed to manage a property, it makes a world of difference to have an experienced property manager to help with the work. Commercial Northwest is the Southwest Idaho leader in Property Management. We have the knowledge, skills and elevated level of customer service that ensures your investment receives the highest quality of management.