For multifamily owners, rent is certainly one of the most critical components of your asset’s financial performance; it affects everything from cash flow to your occupancy rate. So how then do you decide to raise rents, and by how much?
By How Much Should You Raise the Rents at Your Apartment Building?
How high can landlords raise the rents at their apartment properties before they begin to lose tenants? In the current market, many markets have very few apartment vacancies, and face little competition. That would usually be a sign to raise rents. But many renters have already been pushed to the limit financially.
Opening with the tantalizing question “How high can landlords raise the rents at their apartment properties before they begin to lose tenants?”, author Bendix Anderson, writing in National Real Estate Investor, says:
In the current market, many markets have very few apartment vacancies, and face little competition. That would usually be a sign to raise rents.
He balances that observation with the stark reality that:
…many renters have already been pushed to the limit financially. Another rent hike could force them to move in with roommates or their families—or simply to miss the next rent payment.
Bendix’s assessment is backed up by none less than government agency Freddie Mac, where a spokesperson said “A growing number of renters are spending less on non-essentials to make up for increasing rents”.
How Renters Have Reacted To Increases
Bendix notes that renters facing increases are starting to look at other options. Again, Freddie Mac backs that up, with their spokesperson noting that:
A growing number of renters are planning to move because of changes in rent
Statistics from Freddie Mac say that almost half of renters (44%) planned to move in 2017 due to higher rents; the number was up a full ten points from the previous year.
Impact Of Increases Depends On Property Type
Bendix uses data from RealPage and their promperty management software to analyze leases. For class A+ apartments, renters tend to have incomes in excess of $80,000 annually and devote about 20% of that toward rent. bendix notes that these renters have many, many choices and the financial flexibility to pursue them.
But, says Bendix, “owners of luxury apartments that are no longer brand new are in a much better position to raise their rents”. Again using data from RealPage, Bendix found that:
The people who live at professionally-managed, class-B properties earn more than $50,000 a year on average and spend less than 24 percent of that on rent… These residents can generally afford rent increases without breaking the bank.
Some of the room for increases comes because “class-B apartments are typically priced far below newer product—and that’s more true today than ever before,” according to says Jay Parsons, vice president for MPF Research, a RealPage company, headquartered in Carrollton, Texas.
Bendix thinks this means that “property managers can increase their rents sharply and still offer much less expensive units than the new apartments available in their market, even if the new properties come with concessions or free rent.” And Parsons agrees, saying:
There is potential for further rent growth, and we do expect class-B to drive overall apartment rent growth in the next few years
The Problem’s At The Low End
Where there’s not much room for movement is in the class-C and -D buildings where Bendix says tenants “are closer to the edge, financially”. According to RealData, these households earn less than $30,000 a year on average and pay roughly 30 percent of that income on their rent.
Property managers work hard to keep tenants at these properties; and Parsons notes:
Class-C units tend to sit vacant longer than an A or B unit, and turn costs eat up a bigger share of the revenue stream at a class-C property…
He adds:
The risk of increased turnover will limit how much many property managers are willing to push rents… Class-C apartments are rarely able to sustain meaningful rent growth.
The Bottom Line For Multifamily Owners
The experts say you should be careful in raising rents, particularly for lower grade properties. And for the smallest of properties, those typically not included in data sets of professionally-managed, “investment-grade” properties, the risk is extreme.
In many cases, Bendix says it’s important to remember that “Millions of renters live at smaller apartment properties or single-family rental houses that don’t check the income or credit reports of potential residents. Many of these renters can’t show enough income to live at properties with professional managers and some may be near the breaking point financially”.
Use Real Data And Get Expert Help
Multifamily owners know how important rent is to their investment, and now they know there are some real limits to what they can do with rents—especially if their properties are lower grade. Like everything else in commercial investment real estate, it simply pays to have real data and an expert in your corner.
That’s exactly what the folks at Pacwest Commercial Real Estate do for their clients. They combine superb knowledge of the local markets with real data on rents and values. They’re your local experts.
Give them a call today at 541-912-6583!
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