Property Manager Backing Out of Raising Rents
Investor · Atlanta, GA · Member since 2014 · 41 posts · 20 votes
One of my PMs told me they were going to raise the rent from 900 to 925 for a tenant who has a lease expiring soon. After speaking with the tenant, they told me that they will not renew the lease if rent was increased by $25, and then asked whether it's ok to recant the increase.
My question: Is this a wise choice to back out of a rent increase? Tenants are paying on time, and not abnormally hard to deal with than other renters. My fear is that this sets a precedence, that management is "weak". What are your thoughts?
Does it signal weakness. No, I would say it indicates a lazy landlord that does not operate an efficient business.
Replacing tenants should cost next to nothing beyond the cost of advertising and screening. There should be no vacancy time and maintenance cost to spruce up the unit is necessary regardless. The costs of replacing tenants is already build into every landlords expenses and a landlord should never bow to tenants personal needs in operating a business. Landlords that avoid raising rents to maintain a single so called "good tenant" do not understand the business they are in. We are not operating subsidised housing. We do not ask tenants how much they would like to pay we tell them what they are required to pay.
If you are not in business to maximise the monthly return on your investment then you should sell the property and find something else to put your efforts into. Landlords do not subsidise their tenants rent. By doing so you not only lose potential income every month you also reduce the value of your property. Every rental should have annual rent increases.
Lazy landlords put tenants ahead of profits and should look at some other line of investment.
Additionally your tenant is manipulating you and will not move for the sake of a $25 rent increase.
There are two sides to the coin and you have to weight the risks of departure against benefits of staying current in the market. Where are local rents relative to yours for similar properties?
It will cost a tenant more than the $300 annual increase to move.
It is also appropriate to explain why the increase is necessary, taxes, maintenance, insurance, etc all increased.
In my opinion, brinkmanship over $300 is unlikely. I have one last lease at sub-market rates and I can't wait until the term is up so I can adjust to market. My taxes and insurance went up considerably on that property.
Does it signal weakness. No, I would say it indicates a lazy landlord that does not operate an efficient business.
Replacing tenants should cost next to nothing beyond the cost of advertising and screening. There should be no vacancy time and maintenance cost to spruce up the unit is necessary regardless. The costs of replacing tenants is already build into every landlords expenses and a landlord should never bow to tenants personal needs in operating a business. Landlords that avoid raising rents to maintain a single so called "good tenant" do not understand the business they are in. We are not operating subsidised housing. We do not ask tenants how much they would like to pay we tell them what they are required to pay.
If you are not in business to maximise the monthly return on your investment then you should sell the property and find something else to put your efforts into. Landlords do not subsidise their tenants rent. By doing so you not only lose potential income every month you also reduce the value of your property. Every rental should have annual rent increases.
Lazy landlords put tenants ahead of profits and should look at some other line of investment.
Additionally your tenant is manipulating you and will not move for the sake of a $25 rent increase.
If rents in the area are significantly higher and the $25 increase is still a bargain, then it signals weakness. I've recently had a tenant tell me they were leaving when we asked for an increase, actually gave the PM written notice, so I planned for a turnover. I was pleasantly surprised when the PM told me a week later than the tenant called back and asked for a 2-year lease at that price, so they obviously shopped around and found that we were still at the lower end of the range and they'd be paying more if they moved, anyway.
If the tenants will sign a year renewal at the same rate, I'd say lock it up. Does it signal weakness? Or that you're a flexible landlord willing to make smart compromises?
That question aside, I see too often that landlords are short sighted when it comes to rent increases. You want to do everything in your power to keep a good tenancy going. The biggest costs landlords incur are vacancy related: turnover maintenance, leasing fees, and the actual vacancy time. The $300 extra rent you would get will pale in comparison to just one month of vacancy and turnover.
I see what you're saying, compromise is needed when you have a binary decision of a deal or no deal. However, I am also of the mentality of doing what I say and saying what I do. Essentially I would not bring a rent increase to the tenant unless I'm fully prepared to let them walk away. Is simply putting a 'feeler' out to see whether a renter is willing to pay more for the same product a good business strategy?
If you have unrelated properties managed, you have all the freedom to decide any way you want. If the object is part of an apartment building, I would be concerned about avoiding bad precedents.
If the first, and you are in for the money, don't lose a tenant over $300 annually, not worth it. It is doubtful that the tenant will actually move but if he/she is driven by principles, it might happen. Unless your PM has a system in place that avoids a month of vacancy and he does not charge a lease up fee, and you are not below market rent, I would let it go.
It sends a bad signal about management. Whether it's weakness, laziness, incompetence, predatory or something else is debatable, but I don't see it as a positive.
You don't increase rent on a whim or to test the market. You should have researched market rents and be prepared to justify the increase if necessary. I wouldn't suggest an increase unless I was prepared for the tenant to walk. If you're justified in your increase, when tenants start exploring their options, they would see the best option is to renew.
One of my PMs told me they were going to raise the rent from 900 to 925 for a tenant who has a lease expiring soon. After speaking with the tenant, they told me that they will not renew the lease if rent was increased by $25, and then asked whether it's ok to recant the increase.
My question: Is this a wise choice to back out of a rent increase? Tenants are paying on time, and not abnormally hard to deal with than other renters. My fear is that this sets a precedence, that management is "weak". What are your thoughts?
Well, this is weird to me, in that most PMs make money when there is a new turnover and a new tenant. So, I'm curious as to your terms with your PM.
I'd offer a compromise. Give the tenant a 30 day notice that the rent will go up $50 and that they are now on a month to month agreement.
See if they stay or not.
But, $25?? Are you kidding? That doesn't even cover their Starbucks coffee for a month. Not renewing over $25 is insane. So, sure, call their bluff. But, raise the stakes, is my advice. If they don't want to pay $25 more per month for the stability of a year lease, then no problem! They're now on M2M with a rent increase of $50 and no security.
They'll probably stay anyway.
But, really. What is your payment contract with your PM? You must not be paying them a month's rent to find new tenants when there is a turnover, which is standard. For some reason, it's in your PM's best interest to keep this tenant at the current rent. Why is that?
I think it's brilliant IF (and only if) they are good tenants and you don't continue for too many years. Eventually you are giving up too much rent increase and well below market. I am 3 years into a near perfect tenant without increases. Wouldn't change a thing. I will re-evaluate the market again when her current lease expires in September.
The difference is that you didn't say there would be a teensy increase, and the tenant threatened to move out if you did - and then you tuck your tail and say, "Oh, no! Sorry! Please don't move!"
Once a tenant takes control like that - when it's unreasonable - life as you know it is over. They are no longer near-perfect, or even good tenants.
And once they get away with saying no to a measly $25 increase - you can bet there will be more demands because you just increased the size of their cojones exponentially by bending to their threats.
I speak from experience here.
I think it's brilliant IF (and only if) they are good tenants and you don't continue for too many years. Eventually you are giving up too much rent increase and well below market. I am 3 years into a near perfect tenant without increases. Wouldn't change a thing. I will re-evaluate the market again when her current lease expires in September.
The difference is that you didn't say there would be a teensy increase, and the tenant threatened to move out if you did - and then you tuck your tail and say, "Oh, no! Sorry! Please don't move!"
Once a tenant takes control like that - when it's unreasonable - life as you know it is over. They are no longer near-perfect, or even good tenants.
And once they get away with saying no to a measly $25 increase - you can bet there will be more demands because you just increased the size of their cojones exponentially by bending to their threats.
I speak from experience here.
Well I think my PM is actually trying to do me a favor. This is actually the 2nd company I've hired to manage the company in as many years (owned since late 2014). And it's your typical agreement, 8% fee on monthly dues, 1/2 of first month's rent. Due to a lack of payment from the previous PM (tenants paid, PM didn't), I am not doing well on this property and they know it. My fear isn't necessarily the extra $25 I'm giving up, but what you just pointed out. This extra payment isn't going to make a difference for my YoY returns.
...Landlords that avoid raising rents to maintain a single so called "good tenant" do not understand the business they are in...
I tend to agree with Greg, though not usually the way he puts things ;) I have to disagree completely with this point. There are 2 main ways to improve your profit: increase the income and reduce the costs. It seems this is overlooked every time someone thinks about rent. If you have a good tenant who takes care of the property you may be saving $600/year in maintenance costs and $0 in vacancy while you project $500. Raising their rent $300/year and losing them costs $800 and demonstrates that the owner doesn't comprehend the actual purpose of their business: to make money. Not to raise rents, not to tell tenants this or that, but to make money. Whether that is through raised rents, reduced expenses, or low vacancy doesn't matter. Making money is the goal and should underpin your decisions.
Take a look at the entire picture and decide if it makes you more money to raise rent, or if it costs you more. Then decide.
...Landlords that avoid raising rents to maintain a single so called "good tenant" do not understand the business they are in...
I tend to agree with Greg, though not usually the way he puts things ;) I have to disagree completely with this point. There are 2 main ways to improve your profit: increase the income and reduce the costs. It seems this is overlooked every time someone thinks about rent. If you have a good tenant who takes care of the property you may be saving $600/year in maintenance costs and $0 in vacancy while you project $500. Raising their rent $300/year and losing them costs $800 and demonstrates that the owner doesn't comprehend the actual purpose of their business: to make money. Not to raise rents, not to tell tenants this or that, but to make money. Whether that is through raised rents, reduced expenses, or low vacancy doesn't matter. Making money is the goal and should underpin your decisions.
Take a look at the entire picture and decide if it makes you more money to raise rent, or if it costs you more. Then decide.
If only it was that simple. Tenants who draw a line in the sand over a $25 rent increase and get away with it - will no longer be problem-free tenants, from my experience. It will embolden them to start demanding new appliances, or to want a parking space closer to their unit, or new paint, or they'll now want to negotiate you paying for their utilities.
Any successful negotiation results in both sides giving something, and both sides getting something. In this case the tenant "only" gets a rent raise of $25, and the security they don't have to move for a year or the rent going up any more for one year. The landlord gets a slight increase in rent - still below market - and is willing to do this to avoid a turnover. But, offering this small increase, but still keeping rents below market, is a sacrifice on the landlord's part. If they say no to this, then they need to give up something else. Because now they are losing their value - the rents are falling farther behind market rates, and now the landlord has an uppity tenant who isn't so "great" anymore.
Because, I would expect, that if these tenants were to move - the landlord could put the unit on the market for a lot more than just $25 more per month. So, recouping that lost rent may not take as long - and he'll have new tenants who think the higher rent amount is a good deal in today's market.
When tenants get uppity over reasonable changes, you're better off with the "don't let the screen door hitcha on yer way out" mentality. Get a new tenant in who thinks it's a great place at a great price. I learned the hard way that keeping uppity tenants always results in more work - even if it's just having to constantly say "no" to their ever increasingly weird demands.
Funny thing is I do not negotiate rent increases, I do not negotiate anything with tenants. I have never imagined negotiating as any part of being a landlord. I raise my rents every year without question and never take into consideration whether tenants will leave or stay. Financially it has never been a mistake.
I have operated my business the same way from day one. I view my decisions based on treating every tenant exactly the same regardless of their individual personal situation.
I can not imagine having a 100 unit apartment building and determining the rent for each on a individual bases.
Raising the rent is not always the most intelligent thing to do. I have two single family homes identical to each other same model same year built. One tenant has been their 17 years and is $100 under market rent. The other home has had 3 different tenants the last 3 years all renting st market rent.
If you look at my books guess which house makes more money year after year. The tenant who is at below market rent. She pays rent 5 days early every month which is great, she handles 90% of the maintenance herself does not even call me unless it is something major. Takes great care of the home.
You also have to factor since she had been their 17 years if I raised rent to market and she left I would probably have to spend over $5k to update the unit to get market rent, commission to realtor for placing new tenant, 1-2 month vacancy and then how do you know your next tenant will be as good as your last? The risk is not worth the reward in this case.
Tell your tenants you will raise the rent $10 because you want them to stay have another great year with no turnover cost and vacancy.
Hmmm. Has she been $100 below market for 17 years? At $1200/year x 17 years......that's a lot of money to supposedly offset the fact that she handles 90% of whatever maintenance you think she's handling that makes it worth it.
What kind of maintenance are you talking about? Does she replace appliances? Snake drains? Replace roofs?
$1200x 17 years = over $20,000. What could she possibly be doing herself that makes up for that loss? And, if turning over her unit cost $5,000 - compared to $20,000 in lost rent - I'm just not seeing this working in your favor.
I'd have to see all the numbers for all of your units to see if you actually make more money on this tenant vs other units that are at market but turn over more often.
But, of course, the point is - if she told you she would move if you raised the rent - would you happily tell her, "Oh, please don't move! I promise not to raise the rent!" and tuck your tail and leave? Would you have no issue with that at all?
@Account Closed the home has not been under my care for 17 years she originally moved in under the previous owner and at that time it was market rent. And over the years the previous owner let it slip.
As far as what does she do, put in new tile flooring in kitchen. Built a deck in the backyard. Bought her own appliances so I no longer have that maintenance expense.
She sometimes wants to pay for other items, I have to remind her that those are my expenses and I will be paying.
If you factor in 1 month vacancy every 2 years plus painting, other updating, applicance maintenance, realtor commission and other turnover expenses in my scenario keeping current tenant I make more money. Believe me I have done the math several times.
If this were an apt building then no I would increase the rent and risk the vacancy loss as apt buildings are valued on cap rates but sfr are valued by nearby comps and having a tenant who treats the house the same as a homeowner does adds value.
I have a mentor in this business who has over 40 single family homes and has been doing this for over 30 years. He routinely markets at below market rent to get the most amount of applicants and then picks the best applicant. Now I do not fully follow his formula as when I have a vacancy I fill it at market rent but their is some logic to his reasoning.
What you want in this business are long term good tenants. And sometimes taking in a little less monthly for less headache is worth it.
I strongly disagree with those that raise rents yearly just on principle. ( I am not talking about 100 unit apartment houses but rather SFR's. ) In my experience, if I have a good tenant that pays on time and doesn't make unreasonable demands then I renew their lease at the same rent. I end up getting multi year tenants that way and very, very few maintenance requests. I think the tenants figure they are getting a good deal so why rock the boat with BS complaints.
One thing that has not been mentioned is the cost or value of one's time. I self manage so dealing with just one tenant turn over takes time away from my family, my full time job, golf, etc. I am happy to forgo a rent increase if it means another year of steady monthly rent checks, zero turn over costs, zero turn over time, and zero hours away from things I find enjoyable!
I strongly disagree with those that raise rents yearly just on principle. ( I am not talking about 100 unit apartment houses but rather SFR's. ) In my experience, if I have a good tenant that pays on time and doesn't make unreasonable demands then I renew their lease at the same rent. I end up getting multi year tenants that way and very, very few maintenance requests. I think the tenants figure they are getting a good deal so why rock the boat with BS complaints.
One thing that has not been mentioned is the cost or value of one's time. I self manage so dealing with just one tenant turn over takes time away from my family, my full time job, golf, etc. I am happy to forgo a rent increase if it means another year of steady monthly rent checks, zero turn over costs, zero turn over time, and zero hours away from things I find enjoyable!
A turnover usually costs, on average, one month's rent. It takes one month max time-wise. So, basing your rents on not wanting turnovers because of the time involved - needs to take this into consideration.
So, let's say you lose a tenant who doesn't want to pay market rent, and it costs you a month's rent and a month's time. But, the result is a much greater income. And the next tenant stays, probably, at least two years.
I just don't see your justification to lose thousands of dollars of income - because you're too busy to do what's involved to get it. Especially, considering it will probably take at max, a month's worth of extra hours, which happens every couple years or so.
What you're basically saying, in my opinion, is that you are okay with making much less money than you could, in order to have less work to do, and that's why you think keeping long-term tenants at under market rents is a great thing - for you.
Which is fine, of course, But, I don't think this model should be "sold" by you, as somehow making more financial sense in the RE investor sense. Because it really just doesn't.
Sue,
You are making two huge assumptions. One that turnover costs one months rent max and two that it only takes one month max to rent. Most of my homes are between 1600 and 2600 ft.². I pay $.90 a square foot to paint and roughly $.90 a square foot to carpet. With rents in the $1800 a month range, it costs me much more than a months rent to turn over a property. It also takes a few weeks to get the work done and very rarely can I rent a property and have someone move-in within a months time of the last tenant leaving. Of course, it would be different if it was a 600 square-foot apartment so I don't know your situation but I believe my advice is sound.
I don't see the math working for those that always raise rent. Let's say it really does take 1 month of rent value and 1 month of time to fill. Let's also assume a $1200 rent value. Turnover costs you $2400. For the die hard rent increasers, it probably does only cost that much because the unit is still fresh from the last turnover. So now you've done your "I must do" rent increase of $50/year and the tenant leaves after 2 years. You made an extra $1800 over their tenancy ($600 the first year and $1200 the second), but then spent $2400 to turn over. Lather, rinse, repeat. Oh, and don't forget to add in the lost value for your time.
Every property will be different so I tried to pick middle of the road numbers for the example, but the math is certainly in favor of keeping good tenants, both from a financial standpoint as well as from a time standpoint. That doesn't mean NEVER raise rents, but it certainly means consider the full picture. Does it take more thought and flexibility? Yes. Does it work better? Probably.
As mentioned, we're talking about SFR here, not multifamily.
To me, one of the biggest variables in this business is how a tenant will treat your property. Over the years, I have had tenants really trash some of my homes. Anything I can do to minimize the number of tenants and thus decrease this wildcard factor is worth it. If that means foregoing a modest rent increase, so be it.
The cost of everything goes up every year, it's called the cost of living. When a landlord raises the rent each year based on his increased costs the rise is rarely enough to force a tenant to move as in most areas every landlord does the same. Tenants do not move based on a $25-$50 rent increase when all the other properties in the area are at the same rate. However tenants do move on average every 2-3 years meaning you have likely the same turnover costs as if you had been raising your rents annually.
Landlord that only raise their rents every several years to catch up are more likely to force tenants to consider leaving.
If you want to keep your tenants indefinitely simply never raise their rents. It is a common business practice for arm chair landlords to value a good tenant over higher profits. Nothing wrong with it but my practice of raising rents every year has never generated higher turnover than average so either the theory that raising rents causes tenants to move is wrong or my tenants are special.