One of the toughest decisions a building owner or property manager faces annually—as yearly leases come due—is whether or not to increase rent for new and existing tenants.
If, after careful thought and analysis, the answer is yes, then you must also decide how much the rent increase(s) should be.
Of course, you want to maximize your revenue stream, fill vacancies, leverage expenses—from repainting the lobby to repairing the roof—and, of course, show a profit. But, before you decide that a 7- or 10-percent hike makes financial sense, do your homework.
We asked Mark Durakovic, principal and vice president at Kass Management Services in Chicago, for his company’s strategy in managing 5,000 residential units in buildings that range between 6 and 150 units. Here are nine of his best pieces of advice:
Compare, compare, compare.
First, compare prices for the similar-size units in your building. Perhaps, some one-beds are a bit larger than others, or have something extra (like a dishwasher) that would warrant a higher price. Or maybe a tenant has renewed for years so their lease is below market rates.
Then, look at nearby buildings of the same size, with similar amenities and prices. The MLS is a great resource for competitive rental prices.
And last, consider Durakovic’s strategy: use this information to project how much prices should increase. Durakovic explains, “We determine the fair market rate for an existing tenant, which is a smaller increase, and also for a new tenant, which will be more than the prior resident paid. But the key word is project; we’re not writing this in stone at this point.”
Factor in amenities.
Make a list—and check it at least the proverbial twice. Maybe your building has a doorman, on-site super, pool, fitness room, business center, terrace, concierge services, dog park, and so on? These add to your operating costs—and, hence, should increase rents you charge.
Consider the overall economy.
Are indicators headed up—employment rates on the rise? A roaring stock market? Or, is it the complete opposite? If employment is dropping, you might experience more vacancies. “The economic headlines won’t directly impact renewals, but they’ll have some eventual cause and effect,” Durakovic says.
Weigh what’s happening in your ‘hood.
Are more shops and services opening in your neighborhood? Supermarkets, gyms, restaurants, public mass transit make your area and building more desirable. When Durakovic’s company managed a new building in Chicago where there wasn’t initially a grocery store, there was a noticeable shift once one opened. He says, “It played a role in the building’s popularity.” The biggest plus is public transportation, followed by a grocery store and fitness center, followed by nightlife. Far less important, he says, is parking in an urban area since more residents these days use car-sharing services.
Heed real estate trends.
You may be tired of hearing the word Millennials, but they’re the biggest rental market right now. For example, many don’t want to share an apartment, they want their own micro-apartment, studio, or one bedroom. Smaller units are more prized commodities than larger two- or three-bedrooms, Durakovic says.
On the other hand, larger units may appeal to downsizing empty nesters returning to urban areas.
Use showings as a clue.
How much an apartment is shown (and what people say while they’re there) indicates whether its condition, amenities, and price are on target. “What we hear after potential tenants see it is very useful. Maybe, people consider it overpriced. And if it’s not being shown at all that’s an indicator, too,” Durakovic says. “In either case, we’d develop a strategy to garner more traffic.”
Make careful calculations.
Now you’re ready to come up with a fair increase rate. In the current climate, Durakovic’s company makes the increase for a one-bedroom bigger than for a two-bedroom. But, he also increases the rent less for a renewed lease. “I might put a one-bedroom renewal between 5 percent and 8 percent, but charge a new tenant between 7 percent and 10 percent,” he says.
In rare cases, he might not increase the rent at all, which happened when the economy tanked in 2008. “That’s not the situation now,” Durakovic says. “Our expenses have been increasing in Chicago. Real estate taxes are going way up, and so are city water and sewer costs. We’re under a lot of economic pressure,” he says.
Give residents plenty of notice.
To gauge the building’s potential occupancy and help existing tenants, his company sends renewal notices 115 before leases expire. Each notice includes a breakdown of moving costs. He explains, “This helps tenants understand how much it costs to go elsewhere if they don’t re-up,” he says. They expect to receive responses at least 80 days prior to expiration.
Analyze results.
With signed leases in hand and occupancy versus vacancy numbers in, it’s time to look again at your building’s services, condition, and amenities. “Renters have the mentality now of homeowners and with that has come expectations, which many didn’t have before,” Durakovic says. “Granite was an anomaly 15 years ago and now is expected. So are dishwashers and laundry equipment. Know your neighborhood and city and what’s expected. Each has its own dynamic that should influence how much you raise rents,” he says.
How often do you increase the rent? What factors do you look at to help you decide how much more to charge? Get the conversation started below!
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