When to Raise Rents – It’s More Complicated Than You Thought
You’ve acquired an apartment community at the right price and successfully executed your value-add business plan, renovating the interiors and upgrading the community amenities in order to achieve your projected rental premiums. Now, you just ride out the business plan until the sale, right…?
How is this accomplished?
The short answer – perform a rental comparable analysis (commonly referred to as the rent comps), which can be done by you and/or your property management company, using the results to determine if you should raise the rents and by how much. Here is a blog post on how to perform the rent comps over the phone.
However, the more sophisticated (and likely more successful) apartment syndicator will rely on more than the results of the rent comps to determine when is the opportune time to raise the rents. Here are the seven other factors to keep in mind:
1 – The Business Plan
To determine if it is the right time to raise rents, the first question to ask is “what is the business plan?”
Prior to closing on a deal, you should have created a business plan for how you will approach raising the rents during the hold period, which should have been confirmed by your property management company. So, how well were you able to adhere to that plan?
Were you able to achieve your projected rental premiums? Are you on track with the return projections to your investors? Were you able to complete the interior and exterior upgrades on-time? Were you able to achieve the desired loss-to-lease? How are you performing relative to what was projected in terms of occupancy?
If the business plan was executed without a hitch or any major deviations – or even better, if you were able to exceed expectations – then you may consider raising the rents. However, if you or your property management company were unable to achieve one or more of these projections (i.e. rental premiums, investor returns, renovation timeline, loss-to-lease, occupancy, etc.), your focus should be on how to get back on track rather than raising the rents.
2 – Concessions
Another factor to consider is the amount of concessions you are offering to new applicants. The amount of concessions you need to offer to entice prospective residents to sign a lease is directly related to the demand of your apartment community. The more concessions you offer, the lower the demand and the lower the gross potential income.
If your concessions are greater than 3% of your gross potential rent (this percentage may vary from market-to-market), then your focus should be on reducing the amount of concessions offered before you consider raising the rents.
3 – Bad Debt and Delinquency
You also want to look at the bad debt and delinquencies (i.e. delinquent rent and other expenses paid by residents) at your apartment community. Similar to concessions, the more bad debt and delinquencies you have, the lower the gross potential income, which negatively affects your returns.
If residents aren’t paying their rent on-time or if the bad debt exceeds your business plan assumption (ideally, bad debt is less than 1.5% to 2% of the gross potential rent), then your focus should be on minimizing these factors first before you consider raising the rents.
Another question to ask when you consider to raising the rents is, where are my rents relative to my competitors? This is accomplished by performing a rental comparable analysis on a monthly basis, at the very least.
While you do not want to be the market leader in terms of rental rates, if your current rents are significantly lower than a similar apartment community in a similar neighborhood, then you may want to consider raising the rents. The key term here is similar – when analyzing your competition, make sure that the community has similar amenities, similar unit upgrades and similar property operations. In terms of property operations, for example, do both properties include utilities in the rent? Do both properties offer the community amenities free of charge? Do both properties offer coin-operated laundry facilities?
5 – Number of Evictions and Skips
Before you consider raising the rents, review the number of evictions and skips (i.e. residents leaving before the end of their lease) at your apartment community over the past few months.
Evictions and skips are very costly. There are legal fees, turn/make ready costs, marketing costs, administrative costs and lost income associated with both. If you are experiencing a higher than normal number of evictions and skips, your focus should be one minimizing those first prior to raising rents.
6 – Cancelled Applicants
A cancelled applicant is a resident who has signed a lease, has a scheduled move-in date but when that day comes, they fail to show up. Similar to evictions and skips, there are costs associated with cancelled applicants, as well as an overall waste of your property management team’s time.
If you have too many cancelled applicants (with “too many” depending on the size of the property and the market – speak with your property management company to get an acceptable number), determine why they are cancelling and focus on reducing those first prior to raising rents. Because higher rents mean nothing if the resident fails to move in.
7 – Rental Season
Lastly, determine when the peak rental season is in your market prior to raising rents. That is, what month are you currently in and how close are you to the beginning and end of the rental season?
Generally, rental season begins in the spring and ends before winter. So, if you are inside of that time period, it may be the opportune time to raise rents. However, during the winter, your best bet is to focus on maintaining your occupancy rates in preparation for the start of the rental season in the spring.
What about you? Comment below: What factors do you analyze when you consider raising the rents at your properties?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.