Reader Question: Hello, Monty! We are “babe in the woods” investors. We have a duplex in Portland, Oregon. We are not sure whether to raise rents at this time. Expenses have gone up about 5% since January 2013, in line with inflation in the state. Everyone’s heard the bad job data, and we’re afraid we may push tenants out with a rise just at this point. We absolutely do not want to deal with a vacancy. Would you raise rents right now, or wait a bit? Bruce C.
Monty’s Answer: Hello Bruce, and thanks for your question. No one wants vacancies. Being cautious about the decision to raise rents is prudent. The key to your decision to raise rents is much closer to home than what is happening in the state. Local market research in the category of your properties and similar neighborhoods close by may hold the answer to the question.
Knowledge is power – applied
Conducting basic research will provide new knowledge to gain confidence in the decision. Your objective is to learn how the rental market for similar property is performing in your neighborhood.
The City of Portland may have information that can help at the Portland Housing Bureau. Most cities across the US have similar information and programs to help. The website Rental Housing Alliance may be something to study. Check out what they offer. These two entities may save a lot of time understanding your market. Often, cities offer incentives to landlords with improvement loans or attractive financing programs to improve the housing stock.
Learn how many units similar to yours exist in your quadrant of the city. If a quadrant seems too large, take a smaller bite within a 1/2-mile radius of your units. What is the vacancy rate? If the vacancy rate is 50%, it may not be a good time to increase rent. If the vacancy rate is 2%, it may be a very good time to increase the rent.
Become Detective Columbo
Next, become a “secret shopper.” Many industries utilize secret shoppers to watch what the competition is doing. Some real estate owners do this, as well. Pick a day of the week and search for all the similar units found advertised for rent. Search all the different sources a person looking for an apartment could use. Learn the address, the phone number, unit size and amenities and the amount asked for rent. The more units found the better. Hire someone or put your kids to work. An online search for “market rent intelligence” or some similar words will reveal businesses exist that do this work for a fee.
Assume 50 apartments from all advertising sources are contacted. Now try to narrow the list down; first by most similar neighborhoods, then by buildings and apartment. Drive by the 25 units to find the best comparables. Now stop!
Put the final list in a drawer and wait a week. Now call back to see if each unit is still available. Keep track by marking it on the list. Now stop!
Wait a week and call the unrented units from last week. See where this is going? Whether all 25 units rented at the end of the second week, or they are still all for rent, the caller learned something quite valuable. This data is far closer and more important for your situation than can be found elsewhere.
There are multiple data points picked up during this exercise. Absorption rates, turnover rates, average, high and low rental rates will all become clear. This information provides knowledge. Now all that needs to be done is applying it.
Add value to the property
With a better understanding of the market place, now consider going to your tenants and asking them if they will pay more rent. Begin by asking to inspect the apartment as a part of your maintenance program. After your inspection, decide whether or not to ask them if they will pay more rent if they are taking good care of it. Ask them if there were anything they would like to see done to make the apartment better.
It is possible to negotiate a higher rent by making improvements important to the tenant. Do the math, judge the tenant reaction and then decide your course of action. Soften the blow by adding value and some tenants may take you up on it.