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Recently, I was on a call with a group of property managers and DIY landlords in connection with the National Landlord Association, and to my surprise, many asked about raising their rent prices in the coming months.
Over the last few years, states have been more concerned with rising rent prices and passed legislation that limits how often and how much rent can be increased. That leaves landlords and property managers who have made raising rents part of their normal course of business wondering how to proceed. If they don’t increase rent over the next few months, then they’re stuck for another year.
Here’s the thing: The last 10 years have been a landlord-controlled rental market because demand for rentals has far outpaced the supply. When you have more renters looking for a place to live than rentals available, prices go up.
What we’re looking at now is a renter-controlled market.
Renters hold the power in regards to rent, and the faster landlords and property managers adjust to this new reality, the better their business will fare over the next 12 months. It’s important to keep in mind that tenants aren’t thrilled about this power shift either, since it often comes about through their unemployment.
In 2009, jobless claims hit 600,000 at its peak. In the last week of March 2020 alone, weekly jobless claims hit over 3 million. If that isn’t enough to signal a dismal shift, consider this: Those numbers don’t include independent workers in the job market who have been disenfranchised as well. That means Uber drivers, taxi drivers, real estate agents, construction workers, house cleaners, etc. — all of whom are possible tenants.
If history is any indication, as we see the number of unemployed renters increase, we may also start to see divorce rates decrease. Families move in together, more homeowners turn their garage into a rental to help offset their mortgage, the guest room gets filled as children move back in with their parents. These are all scenarios that leave broken leases and push vacancy levels higher.
Not too long ago the rental industry saw a similar situation. There was a time when renters expected to get at least one month’s free rent, plus a TV or free DVD player (I think the era defines itself). The last decade has erased many of those memories and raising rent prices has become standard practice to keep up with a growing cost of living.
Things like lease price increases, higher late fees, inspection fees and payment fees are all ways of increasing the price of rent. So even if you haven’t raised the actual price of rent, tenants can immediately feel when they’re paying more.
Which means a small rent increase could cost you a lot.
As vacancies increase, so will the competition with other landlords and property managers to fill those vacancies. Our firm has already seen a 13% reduction in search traffic for vacant rentals in March. This is an early indicator that there are fewer renters looking for the same number of rental units available.
Vacancies cost money because no one is paying rent. Add in repairs and marketing, and a vacant rental becomes a money pit that just grows deeper the longer it sits empty.
Now is the time to keep rent prices flat and focus on keeping your tenants from leaving.
Keeping vacancies low is the new rent increase. In the next year, growing and expanding your rental business will become more about getting great tenants and then keeping them as long as you can. There are still instances when you need to raise the rent due to the market in your area. You’ll know when it’s time to adjust the lease price when vacancies become few and far between.
Lowering rent is always a welcomed gift to incentivize a tenant to stick around, and there are many ways to lower rent without actually changing the lease price. Allowing tenants to pay late, giving incentives for paying on time, waiving late fees, offering move-in incentives and requiring lower deposit fees are all ways of lowering rent without actually lowering the price on the lease. These tactics will allow you to ratchet rents slowly and see what the market will bear, without putting too much financial pressure on your tenants.
Right now, the federal government has put together a program to give $1,200 per person to many renting households (plus $500 per child), along with some loan assistance for small businesses and even some relief from Freddie Mac and Fannie Mae, to help renters and owners of multifamily rentals.
The effort to limit unemployed renters is there, but it is unknown how much of an impact it will have. What we can plan for is the next 12 months becoming a renters’ market, so changing your rental business to focus more on low vacancy rates will be the key to expanding growth.