We Can Raise The Rents!

Rents are on the rise in most markets today. This is a great way to increase overall revenue and value of our deals. In this article I want to discuss the reality of raising rents and increasing values of our multifamily properties.

As I stated rents are naturally on the rise but raising rents is not always as easy as it may seem. “The rents are below market” seems to be the mantra of realtors today. I can’t remember the last time I looked at a property that the agent didn’t tell me that I could raise the rents and make a lot more cash flow. I agree in a lot of cases the rents could have been raised but rarely can it be done for free.

On average rents can be raised by 1-3% per year without any upgrades needing to be done. This is what we call the “annoyance raise”. When analyzing a deal and considering a rent raise as a “value add” component we need to look at several factors and ask one very important question, “why are the rents currently low?”. In most cases I don’t find that the current owner hates money and just won’t raise the rents because they just love the tenants so much. Your agent may want you to believe that something like this may be the case and you can just magically raise rents but it usually doesn’t work that way.

If you want more rent from your tenants you usually need to give something in return. Outdated units are the most common reason for lower rents (not nice landlords). If your agent shows you units at other properties that have higher rents, you need to immediately shop that property to see how your units compare to theirs. In most cases the properties have upgraded their units and that is why they get more in rent.

Upgrading units is a quick and easy way to gain a rent increase but it is not free. New cabinets, counter tops and new appliances are the quickest and cheapest way to get a rent increase. You should realize about a 20% ROI for all upgrade costs. Bathrooms are also a great place to put upgrade dollars.

By making our units nicer we are more competitive with other properties in the area. Look to see what amenities are most attractive to your tenant base. If you are renting to people in their 20s to early 30s you will be best served with “experience” based amenities such as a B-B-Q area instead of a tennis court. Dog parks and business centers are also great revenue generating upgrades that appeal to the younger renters today.

Job growth in a market has a lot to do with rental increases. There is about a 70-80% correlation between rent growth and job growth in a market. If you see jobs and wages on the increase in your area then rent growth will be much easier. If there is not high wage and job growth then you need to focus on creating value for your tenants through upgrades…then raise the rents.

Below is a list of the top 10 rent growth markets according to Multifamily Executive Magazine’s December issue. This may help some of you who are looking for a new market.

The Top 10 Rent Growth Markets for 2014:

1. Seattle: 5.8
2. San Francisco: 4.7
3. Denver: 4.6
4. San Jose: 4.5
5. Nashville: 4
6. San Diego: 4
7. Austin: 3.9
8. Dallas: 3.9
9. Houston: 3.9
10. New York City: 3.8

Source: Top 10 Rent-Growth Markets of 2014

Good Luck!

Bill Ham