Property Management Blog

below market rent

Web Admin - Thursday, April 04, 2013

I recently read an article about how to keep tenant turnover low. One of the suggestions was to not raise a tenants rent. The author commented that tenants do not understand that taxes go up or insurance goes up therefore won’t understand why rents go up. I for one am in complete disagreement with this concept. Everyone in this business has to understand that this is a business. It’s true that turnover has cost, but turnover is part of the business. Yes, keeping turnover to a minimum is something to strive for, but at what cost? I don’t buy into the concept of tenants not understanding that your cost goes up. Everything goes up, utilities, groceries, and rent. Keeping rent below market value only hurts property owners in the long run.

Two things come to mind. First, when you’re ready to sell your property, the savvy investor is going to do an analysis based on actual numbers. I’ve seen where someone is trying to sell their rental and when asked how much is the rent, they will respond with “we’re getting $700 a month (as an example), but you could get $900”. If the buyer were my client, I would advise him/her to do the analysis based on actual income. This would be true on any business you buy and rental property should be no different. If you can get the higher rent, then that would make your return on investment even better. Getting the higher rent would be because of your effort, not the sellers so why reward the seller for something they did not do.

The second thing that comes to mind is keeping a tenant’s rent considerably below market is the same as supplementing their rent. I have acquired management of properties where the rent was 25% to 50% below what rent should have been. The tenant had not had a rent increase for several years. Not to be heartless, but you’re in business to be profitable. There are agency’s out there to assist people with needs. It is not you. What we have done in those cases where the rent was so low, was to increase the tenant’s rent a little at a time until the rent came in line. We increased the rent quarterly for a year. We did this to help the tenant adjust to the increase over time.

Let me be clear, I’m not against renting your property slightly below market value, as a matter of fact; it IS a good way to keep or attract tenants. The only caveat is that the cash flow meets your goals. What I am against is keeping rent considerably below market. Your taxes will go up, your insurance will more than likely go up, and as the building ages, maintenance will go up. Smart business mandates that you raise the rent accordingly. If it’s a nice property and the rent is right, the tenant will stay.

Here’s to keeping cash flow positive,

Dave

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