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Adjusting Rents In Today's Market

Saturday, January 23, 2016   (0 Comments)
Posted by: Catherine Valdez
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Adjusting Rents in Today's Market

 Be Strategic !

 

 

Some of Alameda County’s communities require that specific notices be provided to tenants advising them of “their rights to request mediation when receiving a rent increase”!  Housing providers who are strategic in their approach and that “maintain good communication with their residents usually find the process manageable”. Good communication with your tenants is the key to smooth rent adjustments.  But at times, the market can move so swiftly we often do not devote enough thought to how it will affect our customers.  On rare occasions you may even find yourself invited to explain your decision to adjust rents at a Review Board or other entity.

 

The following tips are provided as perspective on adjusting rents in today’s improving rental market.  They can help you in formulating your approach to any adjustment you may be considering. 

 

Do any of these apply to your situation?

  • Sluggish Market:  Because of the huge downturn in the economy over the past several years you might have avoided raising rents.  You incurred some major rent losses because of vacancies, existing tenants unable to pay, etc.  In many cases, you may have even adjusted rents downwards. One key here is to communicate well with your tenants. Perhaps add a letter in with your rent increase notice. Describe all the expenses you incurred and major improvements made to the property since the last rent increase. It is also prudent to discuss the “average” rent increases, say over a 5 year period. When viewed from an average, it can be difficult for your rental property “business” to show a profit. By illustrating to your tenants how any increase may average out over a set period, it sometimes graphically illustrates that you are barely keeping up with inflation.
     
  • Operations Expenses Increasing?  Expenses such as water, gas & electric, sewer charges, dump fees, landscaping, roofing, parking lot refurbishing, elevator maintenance, pool maintenance, painting, carpeting, draperies, insurance, taxes etc., all tend to go up. General turnover expenses go up as well simply because more people move away to follow employment, etc.
     
  • Rent Adjustments:  In response to all of the above situations, you need to balance your budget.  You also need to be ready for future increases in costs or perhaps incurring some delayed expenses, etc. If your tenants encountered several consecutive years without any rent increase or adjustment, they may be in for a real shock. This is why good communication is important to help the tenant understand the real necessity for increases.
     
  • KEY:  “Be Strategic!”  Should you impose a large increase to make up for losses?  Trying to make up for “lost time” is a common major predicament for landlords.  Don’t overdo it. Your tenants have budgets too.  Many of them have experienced cut backs.  True, economists tell us that employment conditions have improved, more people are back to fulltime work, etc. But, understand that many tenants have themselves incurred extra debt, increased credit card balances, etc. Sometimes it is better to make consistent adjustments to rents rather than prolonged gaps or delays with no changes.  In other words, a 5% increase a year, for many will be better, than you waiting 4 consecutive years, then trying to do a 20% increase. Making increases on a regular basis or somewhat regular also allows tenants themselves to financially adjust or shop the market to find something they can better afford.

  • Below Market Rents:  Despite the fact that your tenants have enjoyed below market rents for some time, they may not be ready to step up to a large rent increase.  Scrutinize your budget. Hopefully, by next year most tenants will have weathered the negative economy and they will be better equipped to handle an increase that would offset your negative budget.

  • KEY:  Evaluate Rents Annually!   Budget for incoming major expenses etc.  “Tenants usually understand and can cope with reasonable annual increase to meet your expenses.” Again---Leaving rents unchanged for long periods and then attempting to impose an extra large increase when you are hit with huge renovations or maintenance bills are something that most tenants can’t handle.

    (Also make sure that your notice meets legal scrutiny.  Have your attorney review all notices or use notices provided by the California Apartment Association.)

  • 60 Day Written Notice?  Placing a tenant in a corner with a short 30-Day Notice may not be fair.  Give them an opportunity to check out the Market.  Otherwise, they are likely to abruptly submit a Notice to Vacate only to find that they wind up paying more rents anyhow.  Nobody wins.    

    (Always consult with an attorney when serving notices to make sure yours meet legal scrutiny.  Don’t forget- you may also be required to provide additional notice of mediation, depending on the city, or where your property is located.) 

  • KEY: Explain Market Rents:  Another tip or idea is to show tenants that even with this new increase they will still be below today’s typical market rents. You can explain or illustrate this point in your “letter” that accompanies the rent increase notice. Additionally, it is smart practice that long-term tenants’ rents are somewhat below “Market” rents and tenants often expect this benefits for long term occupancy.  

  • Point to Major Improvements  As reviewed earlier, did you spend $50,000 for a new roof, a resurfaced parking lot, a pool renovation, etc?  Be sure to point out those expenses (in a letter) when you are requiring a rent increase. You should budget for new exterior refurbishing, new double pane windows, and also point out those upcoming expenses.

  • KEY:  Encourage Tenant to Contact You with Questions: “This is vital”. Ask them to contact you in the event that your increase really creates a hardship.  Be sincere. Perhaps they have had heavy medical expenses, a temporary layoff or whatever. A minor delay of the increase for a couple months could make all the difference to them.  This could save them from moving and you would have a very grateful tenant with a good rent paying record.

  • Don’t Forget your Local Ordinances:  Always be familiar with any local rent ordinances, mediation ordinances, etc. and make sure your Increase Notices are in legal and lawful compliance. See the RHA Website for the latest information on local ordinances in your City or area.

  • Educate with Rent Evaluations:  As you are aware, regardless of the economy, the expenses associated with apartment management and maintenance operations continue to increase. When evaluating your present rents, you may find your property to be well below today’s market (what other Residents pay).  Example: Starting February 1st to September 2015, the rent on your apartment will increase from __________ to ______________.  A small adjustment does not bring it up to market, but simply closes the gap a little.

  • Other Major Expenses: Let tenants know that you are doing your part to protect and “improve their home”. (e.g., rebuilding of apartment decks, bringing them up to today’s codes.  The new double pane energy efficient windows and exterior redecorating all make for great improvement and the complex looks great!)

  • Encourage Tenants to Compare:  (If you are competitive, this approach should reaffirm the value of your property). For example, let your residents know that they can go out and compare pricing. They should consider that you pay for water, sewer and garbage.  Also, tenants should hopefully appreciate the quality of life you provide and the expenses associated with moving.  If this adjustment is a hardship, a temporary job set back, shorter hours etc., they should make sure to let the Manager know.  It is not your intention to cause anybody to have to move.  Perhaps, you can adjust or delay the increase or offer another option. You can call and let your residents know the adjustment will be done at a future month to help you budget.
     

 

CONCLUSION:  

  

In closing, key points to focus on when considering rent increases include:

 

A)   Establish good communication with tenants providing them with ample notice, reasons for the increase,and provide allowances for special tenant circumstances when necessary.

 

B)   Invite tenant questions and input.

 

C)   Finally, make regular increment adjustments.  Restrain from making huge one time rent increases to make up for lost time instead of consistent increases without multiyear gaps.

 

If you need further information, call us anytime at the RHA Office (510) 537-0340.  


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