Achieving higher than market rents...
Managing your rental income takes a deep understanding of how the market works and some proactivity. Once you commit to a tenant on a lease term, you are stuck with that rate over the term when in most cases you could have achieved more to help you increase revenues. Today I'll walk through 5 key items to consider which will help you look at your investment and your rents in your specific situation and help you get out of thinking that "market rate" is good enough*.
*spoiler, its not if I know you like I think I do…
In a poorly managed property, vacancy is only vacancy or a lack of income, but it is truly the most expensive cost to any income property investor. However, vacancy, for someone who is paying attention, can have a more substantial impact on your investment. Vacancy can be looked at as a cost even though it's technically a lack of revenue. For finance purposes, you should always track your vacancy as a negative revenue line item against "market rents" revenue and this helps you see, in theory, how much you are spending on not having your units rented up.
Example 1: Doesn't Help you learn
100 Unit building @ 5% vacancy, $1,000 rents
2018 Revenue - $1,140,000
Example 2: Helps you see the cost of vacancy
Same building, same vacancy, same rents
2018 Market Rent Revenue - $1,200,000
Vacancy - ($60,000)
Total - $1,140,000
In example 2, you can see that you lost, spent, whatever you want to call it, $60,000 not having units rented. In example 1, you just see revenues and you think "how can I increase this?". The focus should be on vacancy**.
VACANCY AS MARKETING
If you list vacancy like you do above, and you think of it as a marketing expense, you start to use vacancy differently. In a rising market, rents are going up and many people think "its rising market, I'll ask $1,050 instead of $1,000. Hold your horses! The individual consumer does not think in 5% increments, they think, "what is out there, and what can I get for my money now because I need to move!". A market analysis may tell you that rents are increasing 5%, but that is because you are basing it on OTHER PROPERTIES and not your own. This practice essentially makes you target the average and not push into a rising market. A rising market does not usually last a week or a month, but through a whole multiyear cycle. There are little blips here and there, but overall, if a market is rising, its rising for a while as homes are bought, sold, and rented. Ask yourself, what would happen if you had an asking rent of $1,250 from your usual $1,000 rents in a 5% rising market. The answer is...YOU DON'T KNOW and neither do I. This is where "Vacancy as Marketing" comes in and it follows the basic premise and quote from Hockey Legend Wayne Gretzky "You miss 100% of the shots you don't take". My advice here is to test the market. Spend $1,000 in vacancy for one month to potentially get $250 every month for a year. That is a 4 month ROI. The best part about this is that if you are COMPLETELY WRONG, you now know and you can adjust for the next vacancy. Asking 25% above "market rate" is not greedy, or stupid. It is calculated and a great way to turn your vacancy into a marketing tool to maximize your rents. A way to really ensure you feel good about not being greedy with asking rents, is only rent to people who can prove that they have a household take home pay of at least 3 times the asking rent. This way, you know these people have the margin to pay rent and enjoy their life, while you supply them a great place to live.
WHAT DOES MARKET RATE ACTUALLY MEAN?
From Wikipedia (January 31, 2019): The market rate (or "going rate") for goods or services is the usual price charged for them in a free market. If demand goes up, manufacturers and labourers will tend to respond by increasing the price they require, thus setting a higher market rate. When demand falls, market rates also tend to fall (see Supply and demand).
Read this definition carefully and apply it to rental property. The "usual" price. The "going rate". Last but not least, FREE MARKET. By simply increasing your asking rent to meet the "market rate", this actually slows the free market and you miss out on exactly what we are talking about here: Above Market Rate Rents! Existing rents are not market because some people have been paying those rates for years without substantial increase. Asking rates are other Landlord's judgement of the market rate. Both of these items have nothing to do with the consumer, the renter, who needs a home, has an income, and wants to find something they like. You determine the actual “market rate" when people who can prove adequate income to rent the property start showing up for showings. Ask what you think people are willing to pay based on your showing attendance, not the newspaper. MICROMARKETS
You must understand your micro or local market to achieve higher than "market rents". We all pay attention to interest rates, home starts, yadda yadda, but do you actually know what is going on in your specific market? I am taking about an area that the 10 closest postal codes make up. Before looking at "market rents" and choosing to increase your asking rent 5%, look at the supply in the rest of the market. How many vacancies are there? Check Craigslist, call the neighbouring buildings and ask what they have available for rent. If the owner of the neighbouring complex is over leveraged or has too much vacancy, they drive down the asking price from their poor management. Luckily for you, what comes along with poor management, is poor service. Answer inquiries quickly, have a better looking photo, (the basics) and you’ll rent ahead of your neighbour. If "market rents" are dropping in your state/province/country, but there is no available supply in your neighbourhood...increase your asking rate. Always have your finger on the pulse of your competition and have a list of things to do before you set a price for your next unit for rent. Another tip, call local moving companies. They will tell you if people are moving in town or out of town which gives you a good marker of what is happening in the area. TOP NOTCH SERVICE
I grew up working in the restaurant industry, and really learned what "great service" meant. "Service with a smile" is always important as long as you are actually smiling and being sincere, but what about services that don't need you to smile? I am talking about the ones that make other people's lives easier. My comment on Instagram in response to the Old Dawg REI Network's January 25, 2019 Podcast noted that when marketing a vacant unit, all the basic stuff still helps: it should be "rent ready" (clean, no outstanding repairs, etc.), photos posted online, a smiling leasing agent/building manager/owner. But what people often forget is who they are looking for, and when these people are available. You want to market to people who are organized, thoughtful, and earning and income, to live in your rental properties. If you have a leasing agent or building manager who will not show units on evenings and weekends, you're forcing working people to take a vacation day or a lunch break to see the unit (Hint: you significantly reduce your market by doing this and the people who show units outside of 9-5 win). You should also publicly post the showing dates in blocks so you are not showing on ALL evenings and weekends (give your team a break already). Pre-scheduling showings helps you make the showings into an event and something people can drop in to. These simple steps will help you meet more potential tenants and better understand the market with real feedback: “market rents = X”, “we asked X++”, “its been vacant for Y weeks”, “we've shown it Z times”, etc. Be the driving force that is actually impacting the market rent and not just reluctantly joining it. If you do, the tenants are receiving something better than “down the street”.
**I am not an accountant and any reference to accounting or finance in this article is for application to management only and not for bookkeeping or reporting purposes. Please always consult a professional accountant to determine how to keep books on your investment property.
Keaton Bessey is the founder and Managing Broker at Greater Vancouver Tenant & Property Management Ltd. based in Burnaby. Keaton serves the consumer real estate investor by applying his passion for client service and his experience managing thousands of multifamily units across BC. His experience includes new and old assets for private family portfolios, joint ventures, large developers, institutional investors, and Strata Corporations. You can reach Keaton by email at firstname.lastname@example.org.