Rental owners and managers, the top ones, know their properties and the areas those properties sit in. They are in the best position to know what their units should rent for. They know that by taking time to survey the rents of comparable properties. They know what the comparable properties rent for and how they relate to their own properties.
What should your rents be? Might they be higher? What can you do to optimize them? What in the heck is “optimizing”? To get the rents where you want them, you need to do a rent survey. Once you know what the area rents are, you can begin to think in terms of optimizing your rents. Establishing optimum rents involves several considerations.
Optimizing rents means you set your rents where they make you the most money. When optimizing, you create a balance between occupancy and rent amounts. It can be a tricky proposition and of course, as with anything in the rental business, is not an exact science. Some companies sell software that will help you optimize your rents. It could well be that they make money and you don’t.
For example, landlords may not be looking for 100 percent because that’s a money loser. So, if you owned 50 units and were charging an average of $500 a month rent for each unit (just an example, I know rents are higher than that just about everywhere. Plug in your own numbers.) and at that rent maintained 100 percent occupancy, that would give an EGI (Effective Gross Income) of $25,000 a month or $300,000 a year (gross rents less $0 vacancy allowance).
To optimize rents, the idea is to increase EGI over $300,000. Suppose the rent survey discovered that the average rent for your units should be $575? Raising rents to the average would increase the Scheduled Gross Income (SGI) to $345,000, but could result in some vacancies. Discover the market rents for each property and each unit. Once you have that, you can calculate the likelihood and cost of vacancies.
Second, more rent just might be possible. Are you getting all the rent you can from all the units in each of your properties? Rents can often vary within a complex even with similar units. Take your properties one by one. What units can you raise the rent on in the same complex? Some are more desirable than others. Some might have a view, be close to the pool, open onto the first tee of a golf course, or have extra amenities in them. Those can draw more rent than those with a views of the unit next door, that are several blocks from the swimming pool and not even in the same zip code as the golf course. Too often we fail to take advantage of the higher values of certain units and leave money on the table.
Third, are you optimizing your properties otherwise to optimize rent? What can you do to make each of your properties a more desirable place to live? A little tidying up, fresh paint here and there, and neat landscaping are all inexpensive things that mean more rental value. Even painting the lines in the parking lot sharpens the appearance of your property. Drive around and look at properties, both residential and commercial, and notice the difference when parking lots’ lines are crisp and sharp. Are you working with the police, the apartment or rental owners association, and other landlords to combat criminal activity in the area around your rental properties? Cutting down on area crime will also increase rental amounts. Think of what you can do to make your property more desirable and thus able to fetch higher rents.
Figuring operating expenses
Fourth, take a look from another direction. Look at how much your operating expenses and debt service are going to be in the next year, then see how much your rent income will be at current and different levels. With that figure you can calculate your profit.
That requires some budgeting, the bane of many property managers and landlords. We hate it; hmmm, maybe a root canal instead. Why can’t we just manage our properties and let the money fall where it may? You can, but the unpleasant result might be in store. We’ll just raise the rent and hope for the best. You can always lower it later, can’t you? Possibly, but by that time, you might have lost an ideal tenant who went on to another landlord’s property.
Calculate the operating expenses and the debt service. Now figure out how much your EGI would be at each of several rent levels. Let’s use a four-plex that rents for $500 a unit with operating expenses of $5,500 and debt service of $18,000. The Scheduled Gross Income is $24,000 and the total of operating expenses and debt service is $23,500.. That means at current rents you net $500 for the year if you have no vacancies. If two months vacancies occur, you lose $1,000 in operating income, or about four percent, $500 for the year. A prudent landlord would do something to create a buffer so as to guarantee not losing money. Suppose the rent survey says that the units should rent for $525? That would result in a SGI of $25,200. If vacancies remained the same, the plex makes money
That’s the way successful rental owners think and calculate
The idea behind rent surveys is planning for profits. At the same time, by using a rent survey, you can determine average rents and from those optimum rents for a property. Always ask “what will the market bear and still make me money?”
The point is, numbers mean nothing in and of themselves. They only mean something when related to what the numbers have calculated. It is up to rental owners to determine if they accurately reflect the rents for all the units in a property.
