Why do you charge below-market rents?

Question

Given the push for rent control schemes in Illinois -- and no doubt
elsewhere -- to limit year-over-year rent increases regardless of a
change of tenants, or to "preserve" as rent controlled an
apartment where a prior tenant received a controlled rent (for 
whatever reason), it occurred to me that it might be useful to
collect actual situations where you, the landlord, kept/allowed a
rent to become/remain below market. I'm open to suggestions, but I'm
thinking that collecting information that states:

a. your generic
location (Chicago proper (N, S, E, W?), Chicago suburbs (as specific
as you can), elsewhere;

b. the reason for
you not raising the rent (your friend, honoring parents' wishes, just
a really good tenant on a tight budget, saved your life in the war,
soft-hearted, fronted you the down payment for the apartment so
working it off, vacancies cost more, don't need the money, etc. -- whatever);

c. the dollar amount
per month between what you charge and what the market rate would be,
and;

d. the percentage
amount below market of what you charge compared to market rates.

My feeling is that
if we can gather a body of -- ultimately verifiable -- evidence of
landlords charging below market rates, we'd be better able to insist
on vacancy decontrol or other measures that would prevent some young
thug stranger from free-loading on your kindness to a good tenant
who'd fallen on hard times, or whatever.

John Warren · Answer

@John Clark there are a variety of reasons to charge below market rent, and over the long term this is inevitable. In large apartment communities they refer to this as loss to lease. I have started figuring out my loos to lease on some of my properties. My first property in Lyons is probably the easiest one I have to manage, and I have around $75 per unit in loss to lease. I have raised rents 4-5% ever since I purchased it, but the rents were very low when I purchased it. I have four excellent tenants, and the units would cost a lot to turn if I tried to capture that $75 per month and lost a good tenant over it. Also, this property is residential so the value is not based on the income.

In my commercial apartments I have much less loss to lease. I do have a building manager at both of my buildings in Berwyn, and at both buildings the manager gets a reduction for snow removal, cleaning, etc. I also have one or two long term tenants that are also in the $50-75 range in loss to lease. Again, who wants to spend 10k turning a unit if someone is happy paying you 90-95% of market rent? It is better to deploy capital elsewhere and leave well enough alone.

John Teachout · Answer

We are under market on one property. For existing tenants we do raise rents but usually in very small increments. ($15 to $20)

The property we're under market on is occupied by someone that's been there for about 6 years. She cannot afford a rent increase and would leave if we raised it to market. The house will be a time consuming and costly turnover which we are trying to avoid as long as possible. So we just are limping her along. When it does eventually turn over, the rent will increase to market which is about $1100 and she's paying $870.00. Note: she never calls for issues, like ever...

Melissa Rios · Answer

Sending you a PM; I charge below market rate on two independent properties, for two completely different reasons.

Lynnette E. · Answer

My parents charged below rate rent for their last 2 rentals.  It is in a non-rent controlled suburb of LA.

Why?  Long term renters.  One had rented for 39 years and the other for 23 years when my mom passed away.  Also the renters were to take on some of the responsibilities for maintenance, the yards, which they let everything die! and interior painting and floors.  The one that was the longest term renter did nothing they were to do.  The other did do well with the painting and floors.  Put in bamboo floors, etc.  My parents were elderly and had offered the houses to the renters who were 'going to save for the 3% down they needed".   10 years later they had nothing saved, but awfully nice vehicles....

They charged $675 for one unit, $725 for the other.  Identical 3 bedroom houses next door to each other.  Rent rate for the  houses should have been was between $1800 to $2000.  No rent increase in decades.

Was is good for the renters?  Nope!   In the end it was not.  After my mom passed the properties had to be sold and the proceeds split with 11 heirs.  So, they wanted more time to buy the houses, which at that point, we could not give them.  And they were never going to buy the houses, just stall for the cheap rent as long as possible.  We had a long talk with the renters in December, with my mom's health very poor, and they were not wanting to talk seriously about a contract or anything, just the typical yes, buy later, we need more time.  She passed in April.

How was it bad for the renters? when they did have to leave, the longest term renter had a $45k truck and $35k car loan to pay off, so qualifying for a new place was hard.  They ended up moving out to the desert and getting rid of one vehicle, and moving in their daughter and grandkid to afford a house.  The other couple just had a job that was frequently having slow periods, major company, great benefits, poor scheduling.  So they had to move in with relatives.  4 adults, 3 'kids' (of the relative) 16, 17 and 19 yo in a small, less than 1000 sq ft, 3 bedroom house.  So when they had to move, life hit both hard.

Also, the 39 year renters pulled everything they could to try to stay, even though they knew the house would be sold when my mom passed, and had 8 year warning, and low rent to be able to 'save' for the 3% down payment.  I had to deal with disability council accomodation, renter advocacy, news, everything, about how I could kick the poor people out after 39 years.  Not fun!  Fortunately when I told the news media about the rent rate they were paying, showed them yearly notices that recommended they sign up on the waiting list for government housing as the house would be sold after my mom passed.  (Noticed every year since my dad passed, with offers to sell to them $100k below market rate.) And that there were 11 heirs, only 1 in state, and I was moving in less than a year when I retired, and no way to manage or desire to manage a rental that much under market for the rent, the news media did back off.  Oh, plus the kicker, they were illegally, without my mom knowing it renting 1 room for $750 a month!  News media tried the subrenter will be homeless too route (she was unknown to us and not noticed), until they were told that the rent my mom's estate got was $675 a month, so the renters were illegally making money off the subrenter

Oh, never let a renter stay 30 years!  They think they own the place.  And never, never, never let them get rent at one-third the market rate!  They increase their life style to use all their money and think it is your fault they can not afford to move to someplace similar.

Jason Albasha · Answer

Good luck

Why do you charge below-market rents?

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