Property Manager Not raising rents as requested
Flipper/Rehabber · Columbia, MO · Member since 2016 · 27 posts · 31 votes
Property Manager Not raising rents as requested
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Investor · Tempe, AZ · Member since 2018 · 1k+ posts · 731 votes
7y@Scott Houin, this can be a tricky situation, especially not knowing the condition and details of your property and tenants.
I am curious, are management fees based on rent collected or expected?
- If collected, then they would have an invested interest to raise rents which makes their decision more validated.
- If expected, there is no invested interested and your frustrations are definitely more validated.
Make sure you understand your management agreement. Here are some considerations:
- Termination Clause: Is there a fee for termination? They just signed a 12-month lease and some terms state you owe the management firm all their fees even if terminated. So you're forking up that 8-10% of AGI to end the relationship. Plus the additional 8-10% you will pay another firm for the rest of this year
- Lease Renewals: Confirm if there is language stating the owner's request for rental increases and the responsibilities the management company must take. If it specifically calls out this situation, they could be in breach of contract.
- Breach of Contract: What notifications must you give the management firm if they breach or are in breach of their contract? This might be your exit without paying fees. However, you'll need to follow contractual terms which might require written notifications and an opportunity to recuperate.
I think the most important suggestion and considers are :
- Besides this, how happy have you been?: Finding a property manager can be difficult, especially if your property is not highly desirable class. If everything has been great up until this, can you get over this mishaps?
- Can you negotiate?: Consider a conversation with the broker and state that you have been happy with their service, if true, but this really bothers you. If you've been happy, give them the chance to correct it. While not ideal it ever occurred, perhaps they waive their renewal fees so you recuperate some of the lost revenue.
- What will it cost to get a new management firm?: This is not just monetarily, but time and stress. If this is the first hiccup, be reasonable and realistic that you might strike out on another 2-3 PM's before you find another great firm. Plus the time it takes to find a new property manager. Trust me, we work with landlords and finding the perfect property manager can take time! Interviews, comparing rates, reviewing their agreements, etc. That time adds up.
- How much it'll cost for new management?: I indicated earlier in this post that you might be on the hook for termination fees. Plus potential legal fees if that gets messy! Or legal fees for reviewing the new PM management agreements.
If their service has not been bad and this is their first mishaps, be reasonable and give them the opportunity to correct it. Plus it might show their true colors; good or bad. Even if you do decide to get a new property management company, it might make more financial sense to wait for the current management agreement to end so you avoid the termination fees.
If the frustration is so severe that you don't mind paying all the extra fees and costs associated with it, then find a new one and move on. Make sure this 'situation' is addressed in your interviews and, more importantly, called out clearly in the new management agreement to better protect yourself.
96 Replies
- Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes7y
@Scott Houin, I recently went thru a different/interesting scenario.
I have had the same tenant on a property for the last 2.5 years. The last 1.5 we have been on a month to month due to the tenant thinking she was going to be buying soon. Her rent was $1330 a month.
"Market" is somewhere between 1450 and 1550 a month, depending on how you want to market it (I guess).
I approached her with a 1 year lease @ $1400 a month or a 2 year @ $1425 a month. She has always paid early, never late. A good tenant.
I got a 1 page response that my prices were high, her analysis showed it was only worth $1350 MAX.
I LMAO as there was the EXACT same house, down the street, for $1550 a month. I point this property out to her and how it was not as nice as what she was renting from me (busy street).
So I offered her a 2 year deal and 3 year deal at the same prices as above, thinking that was valuable to her. It was not. She ended up 'settling' on the 1 year deal.
I'm sure I am going to lose her at the end of the new lease term. Not because of the way I have treated her, but because she is no longer in the same place in her life. Her kids are now out of high school, so location is not as important as it was when she first started renting from me.
But when she leaves I will have had at LEAST 3.5 years of 100% occupancy, 100% on time rent. Some minor repairs now and then (less than $500 a year and I have a home warranty). So it's a good deal for me.
I'd like to note, for all those interested, that I started with this property 6 years ago with my rent at $1050 a month. My equity has grown $75k from my purchase price. The property is a B+/A- area. The school district rating is 8-9 out of 10. Generally speaking, all I do is hit a button every month saying it's time to pay rent. :-) The HOA sends me 'weed notices' from time to time, to show me their 'love', but that's about it.
- 7yJohn HornerPro MemberFlipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
@Jay Hinrichs we raise rents 3% every year for every unit we own for a renewed 12 month lease, more for a lesser lease term, and as I can recall no one has ever moved out because of it. I don’t think it has to be one or the other, raise rents or keep tenants. You can do both if you go about it the right way.
- Rental Property Investor · Port Orange, FL · Member since 2018 · 78 posts · 43 votes7y
I've dealt with a similar situation before in the past. I think you've got a lot of great feedback on this, but I'd to add one tip that I feel is critical. I highly recommend interviewing other property managers prior to making a decision on how to move forward. I'm not sure what your market is like, however many markets (including mine) have a poor selection of effective, quality property managers. Before moving forward on any decision, I'd recommend having your plan B lined up and ready to go.
- Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes7y
@James Wise thanks! Looking to learn and grow every day :)
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @John Horner:
@Jay Hinrichs we raise rents 3% every year for every unit we own for a renewed 12 month lease, more for a lesser lease term, and as I can recall no one has ever moved out because of it. I don’t think it has to be one or the other, raise rents or keep tenants. You can do both if you go about it the right way.
do you feel there will ever be a cap.. I mean you keep doing that and your units will soon be way over market. ?? A lot of what we did was HUD and they tell yo what they will pay.. I can see this in free market rent.. but free market rent in most markets that are heavy to hud is 100 to 200 a month lower than the hud payment to start with.. and collection is a BEOCH.
- Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes7y
@Scott Houin
Any other service provider doesn't do what you ask and it costs you money, what would you do?
- Investor · Matamoras, PA · Member since 2015 · 111 posts · 32 votes7y
Property management is a business. Let us not forget this.
They never have your investment property in your best interests. Its directed to only profit the management company.
Raising rents 25$ a unit is going to cause a many phone calls and emailing. It might even call for a trip to the property from the office pm.
They probably didnt raise the rent because of that reason. Also hoping you just go with that.
So...
You really have to ask yourself?
Do I have a 2nd option for a PM or should I go back to self management?
All pm companies will do this.
- Real Estate Broker · Indianapolis, IN · Member since 2009 · 575 posts · 496 votes7y
This was a fun topic to read through... loving the different perspectives. You can tell who has been on the management side a lot of rental properties :) Its a tough gig.. So I wanted to comment on a few different aspects of the thread. I know Im late to the thread and there has already been some great comments. (my favorites are from Jay, James and Joel, btw).
I will say the communication is the absolute number one 'make it or break it' aspect of property management. I guess you could say that about any business but specifically in PM when dealing with the owners and tenants who purposely don't speak directly with each at all. So it sounds like they didn't pass that test. I mean at least you could get a hold of them before and after they re-leased the units.
The next thing is organization. Maybe they were to busy (aka: disorganized, under staffed, whatever else..) and forgot to attempt to raise rent. Well, if that was the case then they could have owned up to it and said "oops my fault it wont happen again" or something like that.
If the case was that they are truly market experts and they knew that raising the rent would cause a vacancy and therefore they have protected you from taking on that expense (which really is a strong possibility imo), then thats excellent, however it goes back to communication and lack there of. How will your clients know that you are doing them a favor if you don't tell them why you did what you did?
For us as a management company we absolutely advise against raising rent on existing, paying tenants that keep the unit nice. We actually lower rent by $25 after year one if they sign for an additional 2 year lease. And then we keep that rate going forward. Its also completely case by case as well... In some situations, areas improve, taxes go up and if one of our clients tells us to raise rent on the tenants then we have to take all things into consideration. If for example the area has improved (and taxes go up) then you have a justification for raising rent and its very possible that the tenant can see the value, agree and sign another lease at an increase.
But in the case that an owner wants to raise rent every year arbitrarily then we have every right as a management company to say that we aren't comfortable with it, and that we think it will cause vacancy, anger the tenant, etc. As a property management company its hard enough as it is to keep a good reputation with the tenants, and keep them happy with the condition of the property all the while making the owner happy with there numbers too. The management company should (IMO) have every right to make judgment calls like this, they just need to be clearly communicated. Keep in mind that most tenants aren't going to understand or care about inflation and your ROI. In fact a lot of times tenants are insulted by a rent increase and they actually think you want them to move. And yes like Jay said theres probably another competing rental across the street that was just renovated and its $25 less per month. A lot of markets are highly competitive like this. Think about all the hedge funds that bought from 2010 - 2015 that only need a 4 or 5 cap. Thats your competition.
This brings me to my next and final point... the notion that the owner of the property is "the boss" and that the property management company works for them.. Im calling shenanigans. Not true. This is not that type of relationship. This is more of an equal partnership. And guess what.. There is a 3rd party who's just as important. The tenant is just as big a part of this on going relationship as the owner or the manager. The tenants are PEOPLE, they are part of a community, they have a voice, they talk... They are the ones who obtain and send you MONEY. Very important role. I think its easy to forget when you don't have to deal with them directly.
Ok.. just fyi, that was not directed at anyone, just a rant. thanks for reading. :)
- All Over, USA · Member since 2017 · 689 posts · 756 votes7y
Originally posted by @Joel Owens:
Property manager is one of the lowest paying, most demanding, typically crappiest jobs out there in real estate. To be good at it you really have to love it and want to do it.
I will say this. The top 100 left to squeeze out in rents tends to be the hardest.
Alot depends on the age of your properties.
There is more loss than asking a higher rent and if it doesn't rent lowering it back down. The issue is an existing tenant might have been living in the property for years. To them the dents,dings, scuffed paint, worn carpet etc. looks normal. They move out and another tenant wants to move in and with a fresh set of eyes they notice everything. So now you might be spending thousands to get rent ready again at an acceptable level a new tenant would take the unit in versus an existing tenant.
If you get another 25 a month in rent but spend thousands to get a new tenant in per unit then value might be increased on the back end but will take a long time to get the money back in years.
The property manager maybe the communication system could be improved or maybe there was a misunderstanding it's hard to know. Inflation average is generally about 3% a year. I would maybe tell the property manager you respect their opinion and expertise and for them to prepare a detailed report outlining their postion why a 25 dollar annual rental increase is not sustainable. It would be telling if they have hard data to back up their position or were just lazy and did not want to deal with a tenant leaving, having to manage a rent ready rehab with the owner usually complaining how expensive it is costing, and landing a new tenant.
We usually look at a LOYALTY factor with tenants meaning - How long have they been there? Have they always paid on time? Have they taken good care of the property? etc.
My clients on the commercial side are on another level generally. These are people already millionaires to some worth tens of millions or more and their business or job throws off close to seven figures a year to them personally. So they care more about tax shelter, high quality property and location, cash flow is usually 3rd or more down on the list instead of 1st.
When net worth grows the mindset tends to change for many on accepting less headache for less yield. Someone with 200k at 10% return is only 20,000 annually. Someone with 2,000,000 at 10% is 200,000 a year for themselves before taxes. Huge difference in being able to be comfortable off of the cash flow coming in.
I definitely agree about that last $100 being the toughest and for me, not worth the squeeze. I leave cashflow on the table with mine. It’s the price I pay for being able to pick and choose my tenants.
Examples: We just filled one of my vacancies this week with a credit score > 700, monthly income over 6x rent, no evictions, no crim history, and probably never told a lie in their life.
- Long Beach, CA · Member since 2017 · 107 posts · 82 votes7y
@Jay Hinrichs I bought my first condo in LA 2.5 years ago and inherited a section 8 tenant. She has 5 kids and is a single mom, looked like she took great care of the place and I knew she had nowhere to go. Section 8 in LA is not easy to find so the landlords can be picky, and seeing all those kids means less desirable. They do not know she has everyone take off their shoes and loves being zen. With that said, I have raised rents twice already. From around $1800 to start to $2200 now. I have to be careful as the way section 8 works in LA is you put in a request and it has to be fair market value, if it is not they will not only reject your request but lower your current rent for the year. Obviously, this is a different situation being section 8 and all, but in LA the tenant still must pay a portion of the rent. With that said, an extra $400 a month in one year pays for two months of vacancy in itself. Turnover costs are minimized in some ways, but if she left some of the stuff I would fix is stuff I will do anyway in the next year or two with her or without there so it is already spent costs.
- 7yJohn HornerPro MemberFlipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
Originally posted by @Jay Hinrichs:
Originally posted by @John Horner:
@Jay Hinrichs we raise rents 3% every year for every unit we own for a renewed 12 month lease, more for a lesser lease term, and as I can recall no one has ever moved out because of it. I don’t think it has to be one or the other, raise rents or keep tenants. You can do both if you go about it the right way.
do you feel there will ever be a cap.. I mean you keep doing that and your units will soon be way over market. ?? A lot of what we did was HUD and they tell yo what they will pay.. I can see this in free market rent.. but free market rent in most markets that are heavy to hud is 100 to 200 a month lower than the hud payment to start with.. and collection is a BEOCH.
Good question, yes I’m sure there will be a cap. Home prices and rents have been increasing since the recession but some day the market will level off and we will reevaluate. We don’t do many section 8, but the ones we do have will pay whatever going rates are for those units/neighborhoods. We make our case by showing existing leases and they will typically pay that.
- Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes7y
@Scott Houin yes I would fire them. They don’t seem to be acting in your best interest. Maybe they are just lazy.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Ken Virzi:
@Jay Hinrichs I bought my first condo in LA 2.5 years ago and inherited a section 8 tenant. She has 5 kids and is a single mom, looked like she took great care of the place and I knew she had nowhere to go. Section 8 in LA is not easy to find so the landlords can be picky, and seeing all those kids means less desirable. They do not know she has everyone take off their shoes and loves being zen. With that said, I have raised rents twice already. From around $1800 to start to $2200 now. I have to be careful as the way section 8 works in LA is you put in a request and it has to be fair market value, if it is not they will not only reject your request but lower your current rent for the year. Obviously, this is a different situation being section 8 and all, but in LA the tenant still must pay a portion of the rent. With that said, an extra $400 a month in one year pays for two months of vacancy in itself. Turnover costs are minimized in some ways, but if she left some of the stuff I would fix is stuff I will do anyway in the next year or two with her or without there so it is already spent costs.
your talking apples and oranges compared to rentals in the mid west which are plentiful.. its not high demand low vacancy west coast. could not be farther from reality..
- Rental Property Investor · Littleton, CO · Member since 2014 · 150 posts · 114 votes7y
I think automatic yearly increases don't make sense because as others have said, turnover is a revenue killer.
That said, the property manager completely ignoring your request is unacceptable and not businesslike. If they felt the increase was unwarranted they could have discussed it with you, then if you were still insistent upon the increase, passed it to the tenant. Most tenants don't want to incur a hassle of moving unless the property isn't well maintained or there are other issues that make them want to move. $25/month probably wouldn't make them bolt.
- Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes7y
Interesting thread.
I will say in my market my business costs (taxes, insurance, labor) are going up AT LEAST 5% per year, so if I am not raising rents in small incremental amounts, my ROI will be eaten alive. Then I will have to raise rents more drastically, and everyone gets "sticker shock." One should be passing on these costs (or at least sharing them) with the tenants.
I get it that "automatic" rent increases are folly - you have to know your market - but if your costs are going up, this needs to be addressed. Sooner, rather than later. Now, I don't have as much data as a lot you on here, but I've never had someone move over my "annualish" rent increase (which is usually between $15-$25 every 12-18 months).
Someone (I think @Jay Hinrichs) said something like "it's only $200 to $300 per year." The part they left off was "per unit." If you have 20 units, you are leaving some serious money on the table that could be going to provide for your family.
A counterargument will be "I'll raise rates when they move." Well, if you were living in a unit that, after a year, is $100 under what all the other places in town are going for, and $125 under market the next year, and $150 the following year, etc....would you move? ;)
I know Jay is in a unique and enviable place in his life where the ROI is of less importance to him (God bless you, man), but I still say I have a business to run. I build in a 10% GSR vacancy cost to my building expenses. My vacancy is never that high on a stabilized property, but the reserves are there and there is that meat on the bone because of my rents.
Yeah, vacancy is a profit killer, but so are stagnant rents with inflationary costs. A death by a thousand cuts.
"Turnover happens." Plan for it, and operate your business to give your tenants a clean, well-maintained and comfortable place to live. Create that value for them and they will stay, even when you raise the rent.
- Rental Property Investor · Member since 2019 · 48 posts · 38 votes7y
Originally posted by @Wesley W.:
Interesting thread.
I will say in my market my business costs (taxes, insurance, labor) are going up AT LEAST 5% per year, so if I am not raising rents in small incremental amounts, my ROI will be eaten alive. Then I will have to raise rents more drastically, and everyone gets "sticker shock." One should be passing on these costs (or at least sharing them) with the tenants.
I get it that "automatic" rent increases are folly - you have to know your market - but if your costs are going up, this needs to be addressed. Sooner, rather than later. Now, I don't have as much data as a lot you on here, but I've never had someone move over my "annualish" rent increase (which is usually between $15-$25 every 12-18 months).
Someone (I think @Jay Hinrichs) said something like "it's only $200 to $300 per year." The part they left off was "per unit." If you have 20 units, you are leaving some serious money on the table that could be going to provide for your family.
A counterargument will be "I'll raise rates when they move." Well, if you were living in a unit that, after a year, is $100 under what all the other places in town are going for, and $125 under market the next year, and $150 the following year, etc....would you move? ;)
I know Jay is in a unique and enviable place in his life where the ROI is of less importance to him (God bless you, man), but I still say I have a business to run. I build in a 10% GSR vacancy cost to my building expenses. My vacancy is never that high on a stabilized property, but the reserves are there and there is that meat on the bone because of my rents.
Yeah, vacancy is a profit killer, but so are stagnant rents with inflationary costs. A death by a thousand cuts.
"Turnover happens." Plan for it, and operate your business to give your tenants a clean, well-maintained and comfortable place to live. Create that value for them and they will stay, even when you raise the rent.
You make an interesting point. At the risk of TMI, my wife still owns a property that she and her ex-husband purchased and rented out. Her ex pays almost $300 out of pocket every month for the tenant to stay there because his view is exactly like you said. He plans to raise the rent when the tenant moved out to prevent turn-over. Exactly. 10+ years later, he has lost over $36k by subsidizing the tenant because of this mindset.
Amazing there really are folks who adhere to this strategy at such a high cost. Makes a solid case to outsource your property management in my opinion. Not every PM is good but not everyone makes a good PM either.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Adam Peacock:
Originally posted by @Wesley W.:
Interesting thread.
I will say in my market my business costs (taxes, insurance, labor) are going up AT LEAST 5% per year, so if I am not raising rents in small incremental amounts, my ROI will be eaten alive. Then I will have to raise rents more drastically, and everyone gets "sticker shock." One should be passing on these costs (or at least sharing them) with the tenants.
I get it that "automatic" rent increases are folly - you have to know your market - but if your costs are going up, this needs to be addressed. Sooner, rather than later. Now, I don't have as much data as a lot you on here, but I've never had someone move over my "annualish" rent increase (which is usually between $15-$25 every 12-18 months).
Someone (I think @Jay Hinrichs) said something like "it's only $200 to $300 per year." The part they left off was "per unit." If you have 20 units, you are leaving some serious money on the table that could be going to provide for your family.
A counterargument will be "I'll raise rates when they move." Well, if you were living in a unit that, after a year, is $100 under what all the other places in town are going for, and $125 under market the next year, and $150 the following year, etc....would you move? ;)
I know Jay is in a unique and enviable place in his life where the ROI is of less importance to him (God bless you, man), but I still say I have a business to run. I build in a 10% GSR vacancy cost to my building expenses. My vacancy is never that high on a stabilized property, but the reserves are there and there is that meat on the bone because of my rents.
Yeah, vacancy is a profit killer, but so are stagnant rents with inflationary costs. A death by a thousand cuts.
"Turnover happens." Plan for it, and operate your business to give your tenants a clean, well-maintained and comfortable place to live. Create that value for them and they will stay, even when you raise the rent.
You make an interesting point. At the risk of TMI, my wife still owns a property that she and her ex-husband purchased and rented out. Her ex pays almost $300 out of pocket every month for the tenant to stay there because his view is exactly like you said. He plans to raise the rent when the tenant moved out to prevent turn-over. Exactly. 10+ years later, he has lost over $36k by subsidizing the tenant because of this mindset.
Amazing there really are folks who adhere to this strategy at such a high cost. Makes a solid case to outsource your property management in my opinion. Not every PM is good but not everyone makes a good PM either.
I would sell if it was negative as long as I was positive or break even.. that's how I handled it.. I made my money on IRR not cash flow I did not need cash flow
- Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes7y
@Wesley W. it was probably me that said it was only $200-$300 a year. yes. per unit. but you missed the second part of what i wrote. if you lose a tenant because of that $200-$300, then now you are negative (you still pay Insurance, Tax, utilities, and mortgage while the place is vacant) PER UNIT. so if your unit was vacant for a month, i think you'd probably end up in red even if you increase the rent for $300 in a year. Maybe its different in the coastal areas with REALLY low vacancy rate and you can get a new tenant in a week.
I have a property that I closed in mid December in Indiana. That property was really popular property had 47 application initially when we listed on market. after two failed attempts of trying to put in section 8 tenants (thanks to government shutdown) its still vacant after 2.5 months... having 47 application tells me that I probably set the rent too low, but even then with abundance of options to choose from its still vacant... so yeah, sh!t happens.
I think the good blend is don't raise rent unless you are significantly below market or when the tenant leaves. How you want to define the amount of "significant" is probably up to you. If my rent was $150 per month below the market, I will raise it because that's pretty significant to me and even with 2 months vacancy i can easily get the lost profit back after few months of renting for $150 more.
- Rental Property Investor · The Vampire State · Member since 2013 · 2k+ posts · 2k+ votes7y
@Michinori Kaneko I stand by my previous post, and once again in my experience I have never had (nor heard of) a tenant moving from their apartment for an annual rent increase of $25 or less when the new amount continues to be at or below market rent. Hypothetically, if a tenant did move, and the unit was not priced above market, I would question whether or not that tenant could afford the place they were leaving in the first place.
YMMV and everyone is free to run their business as they wish.
I'll stop short of this myself, but some people, like "Jake and Gino", claim that if you have 100% occupancy your rents are under market. ;)
- Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes7y
makes sense Wesley. thanks for sharing your thoughts!
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