How to Raise Rents | HTH029 | 603

Today, we are speaking of raising rents and giving you the strategy that will allow you to increase your lease number, keep your tenants and maintain a credible relationship with them. This is an important topic not only because it’s about accumulating dollars but because it’s a way for investors to improve their portfolios. Learn why you should know the market before raising rents, how to do it, and what the impact of small increases on your return is.

What You Will Learn About How to Raise Rents | HTH029:

  • Why you have to know the market
  • The tool for researching and comparing rents
  • Why you should plan ahead
  • How to talk to your tenants about raising the rent
  • The nuisance vs move-out raises
  • When to do it
  • How small increases in rent impact your returns
  • The other small changes you can make to make the better use out of your time and money

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Transcript:

Speaker 1: This is Theriault Media.

Don’t wait for appreciation to buy real estate, buy for cash flow and wait. In other words. Hold that house. Your hosts, Matt Andrews, and Matt Theriault

Matt Theriault: Hey, flipping houses can make you rich, holding them will make you wealthy. This is the Hold That house show and I’m Matt Theriault and over there is Mr. Matt Andrews.

Matt Andrews: Great Scott.

Matt Theriault: And before we begin … I always get energized after you have your drop over there, that’s Doc Brown from back to the future. Go for it. We’ve got a free gift for you, just for you, go to holdthathouse.com and download the four-hour work month, the 10 commandments to managing property managers. It’s the key ingredient to financial independence through real estate that they are not telling you about. Did you get that? The key ingredient, the key to financial independence through real estate that they’re not telling you about, and you can get that for free at holdthathouse.com. Yes, the key is free.

Matt Andrews: They won’t tell you.

Matt Theriault: They won’t tell you.

Matt Andrews: But we will.

Matt Theriault: But we will and we’ll give it to you as well. All right, so we’re going to have a good subject today I think, I think a lot of people are going to tune in to this episode because it’s a question that is on a lot of investors’ minds, a lot of landlords’ minds and that’s how to raise rents. So, Matt, I’m going to turn a big portion of this episode over to you just because you’ve done a lot more managing of the actual properties than I have because you happen to live in your neighborhood and where you have investment properties or very close by much closer than I do. So, I’ll chime in if I can add anything, but most of my stuff has been by property managers that have raised my rents but fire away, dude, what’s the number one way to raise the rent?

Matt Andrews: We’ve talked many times about how you want to get to the point where you’re just making fine tweaks in your portfolio to make it better and better, right? So, what can add more to your bottom line quicker than across the board or at least on a regular basis, taking your rents from where they are and very justifiably, taking them up a little bit higher? How do you do that? And how do you do it in a way that people don’t get mad and move out and it hurts you, right? So how do we do this?

So this is just a few tips, things that I’ve used both when I was managing my own properties, like you just alluded to, and you guys I managed my own properties, I was a terrible property manager actually, managed my own properties for seven, eight years before I kind of came to my senses and hired people that were equipped to do that and have the right personality that, had the right tools. But I learned a lot in my time when I did that so I knew what I wanted to hire and this is how I did it when I was doing it, and this is how I kind of help and direct some of the property managers that I work with to help them raise rents too. So, these aren’t earth shattering tips, let’s just talk about it.

Tip Number One, obviously you got to do your research first. You have to research market rents. You’re not going to raise rents or at least not on a lot of people without causing problems if you’re raising past the point that they could go and easily get another apartment or another house for the same price, right? So, know those market rents, and your property manager, a good property manager should be able to tell you that, he should be able to tell you, “Hey, we’re a little bit low here on the rents,” or “I don’t think you can get this much for the rent.” He should be able to give you a range there. But you can do this too, and this is something that you can do as you’re looking at your statements, as you’re looking at the markets that you’re investing in, to use some simple tools just to see. And one that I like is a rental meter or Rentometer, not a huge robust tool, just go to rentometer.com and you can basically type in a little bit of information, it’ll tell you if your rent is high or lower average for the area.

Matt Theriault: Have you been to that website recently?

Matt Andrews: You know what? I think I haven’t the last couple of weeks.

Matt Theriault: They’ve made some considerable upgrades and now they have a pro version, they limit to your number, it’s not unlimited searches anymore. Right. So, I went ahead and I upgraded-

Matt Andrews: Got the pro version. I’ve talked to those guys and I forget the owner of that company, but yeah, they have a good tool there and I think they’re going to add more to it and probably bring more value to landlords and property owners.

So, I use that especially when I’m moving into a new market, I’m not as familiar with what the rents are and I’m kind of trying to figure out, could I raise these rents or should I buy this duplex? And if the people move out, or if I move them out and they’re at $500 a month, could I justifiably get 600 a month on the next round or whatever it is. So, I’ll go to rentometer, type in my property information and just make sure I’m in the range. If I’ve got a lot of properties, and guys I should say too, this makes a bigger difference, the more properties you have, obviously. So, if I’ve got 10 properties in a certain part of the city, and I looked at every one of them are rented for around 875, 900 and everything else being advertised, and totally justifiably, things are renting for $100 more than that on every single one of them, those might be candidates then to raise that rent. But you don’t know that unless you do that market research first.

So, you’ve got to know that, your property manager should be bringing you that information but as the portfolio manager, which is what you are with the properties that you own, no matter where they are, it’s your responsibility to sometimes call your property manager’s attention to that and say, at least ask the question, could these rents be raised? Would it affect us adversely if we did that? So that’s step one is researching the market rents.

Now step two is obviously planning ahead, all right? Nobody wants to get a knock on their door that tomorrow your rent’s going up, just wanted you guys send know, “Knock, knock, knock, I’m the landlord, tomorrow your rent is going up.” So this is something that obviously needs to be planned ahead, something you need to put in place yourself or with your manager 30, 60, 90 days ahead, I like to give a lot of notice to let people warm up to the idea, “Hey, just so you know …” and you could even say this, and Matt, you and I talked about this, “Just so you know, countywide or citywide, all the rents are raising,” And for your properties, if I own 10 properties in Tampa or 20 properties in Alabama or whatever it is, and you’re gonna raise the rents on all of them, then that’s factual. “Hey, just so you know, all our rents across the board citywide are raising up to this level.” And it gives them some advance notice, it lets them know that, hey, this is a market kind of thing, this is a big industry or citywide thing, not I’m raising your rent, I’m doing this to you, or something like that. So, “Hey, everyone’s rent is going up by $35-

Matt Theriault: Much softer landing.

Matt Andrews: Much softer landing.

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Matt Andrews: And your tip three is to do it in a tactful way, and if your property manager ever meets with people face to face, that’s not a bad place to at least let them know or prepare them for the idea that is being raised instead of just receiving a notice at their door that their rent is going up by $50 or whatever it is so being tactful about how you notify them about it is obviously big.

And then kind of framing it the right way too. Whenever I was doing this personally, if I was talking to the tenant, and I wanted to raise that rent by $35, I would say, “Hey, look, all their rents are raising this year by $55 and you’re a long-term tenant, I really value you, and so I want you to know how much I appreciate you and here’s what I’m going to do for you, all these rents are raising and most of them are raising to $55, we’re going to raise your $35 because you’re a long-term tenant, we want to reward you.”

Now, what have you just done guys? Instead of saying, “Hey …” One way you say, “Hey, you’re being penalized, I’m going to raise this $35, and there’s nothing you can do about it.” The other way, the way that I just explained it, you’re basically saying, “Look, all these people are gonna have their rents raised, but I like you and you’re a good tenant and I’m going to reward you for being a good tenant.” You’re still raising their rent by $35 but you see the way you’ve tactfully done that. So, I teach and instruct my property managers to do that. Don’t just say you’re going to raise it $35, say you’re gonna raise it this and then give them something, give them something back. And those little things and a good property manager is good at that stuff, those little things can make the difference between if someone gets mad or someone moves out or whatever it is.

And thinking about two, we talk about, and this is maybe property managers speak, there are nuisance raises and there are move out raises. So, a nuisance raise is “Hey, my rent raised $25 or $35 or $45, I don’t like it as a tenant, I don’t like that my rent raised but you know what, I’m not going to move out, that’s not worth moving out, I’m not going to do it, that’s a nuisance raise. Now you raise that same person, even if it’s a justified, and even if they’re paying $150 under market rent, you try to raise him $150 a month, well now that’s gone beyond nuisance, that’s a move out raise, that’s a raise that get a lot of people raising their hand and saying, you know what? I’m moving out, that’s way too much, you can’t do that. Over a five- or six-year period, you can do it $35 a year or every other year, something like that and get to that point eventually, but you can’t do that all at once. So, you’ve got to be tactful about the way that approach is and the way they approach that. So that’s another tip.

And then really the last one that I would recommend is talking with your property manager, it’s different in each market you’re in probably but you want to raise rents, especially if you own an apartment building, let’s say it’s 50 units or something like that, this becomes a huge income, increased potential to be able to raise rents across the board. But if you’re in that situation or are going to do that, do it at a time where it’s easy to refill, those units that you’ve lost. So, you own 50 units, it’s one apartment complex, you want to raise everybody by $35 or $45 or whatever it is, make sure you do it at a time where there’s already turnover and a time when people are looking for it. So, summer and spring are those times just across the board nationwide when people move more often, right? They are moving more often in those summertime months, those are times when people have some more flexibility and we just see more move ins and move outs at least in certain parts of the country I’m in, and we see more move outs in those summertime months than any other time. So, it makes sense to raise those rents and do that at a time where it’s easy to fill those units if you do lose a few.

And if you’re talking about multiple units and you’re talking about a big portfolio, whether it’s single family homes or apartments or whatever it is, and you own 20 or 30 or 50 units, guys, just a small bump in rent on all those covers the one or two people that might leave and that you have to replace, it covers it in a month or two to have that vacancy, and then obviously after that it just grows and grows and grows.

So much of fine-tuning our portfolios, and Matt, I know you know this cause you look at your statements every month and you think, what’s the highest and best use of this money? Do I still have this money in the right place? Should I sell these units here and get these units over here? At that point guys, when you reach that level where you’re looking at a big portfolio and you’re looking at everything you’ve got, the money’s made $15 here, $15 there, a little raise here, a little tweak there, a reduction in a fee here, it’s all those little fine tweaks, right? You’re not going to have a home run, it’s little tweaks. You do that year after year, you just keep building that portfolio and keep putting that forward into the right direction, that’s when it gets to be fun, is when you’re actually just making those little tweaks and you’re saying, “Hey, these same properties produced this much more this year, and it was because I did these little things.”

So, raising rents is just one of those tweaks. It’s something that should be happening especially in markets where the rentals are really sought after, you should be doing that all the time because people are always going to look at it and say, you know what, $35 more or this much raise in rent, but if I left here and moved, I’d go over here and I’d pay that same amount, it’s not worth moving. Or maybe I’d even pay a little bit less over here, it’s still not worth moving. And so just really identifying that nuisance raise versus the move out raise is a really big piece of it.

And those are my tips, that’s how I approached it, that’s how I worked it when I was managing it myself, that’s how I direct a lot of my managers to do it. And obviously, the better manager you have, the more they’re going to bring this stuff to you proactively. So, man, I know your managers, you’re saying you don’t deal with that too much because they’re raising those proactively, just a quick question, how do you speak with them about that? Or do they have any general practices or are you just counting on them to research that market and know when they can do that and they’re always looking to do that?

Matt Theriault: My favorite question when I’m researching rents is I’ll ask the landlord what if you had to rent this property in 30 days or less, what would you have to rent it at? So that, again, it gives me real market rent because you can hold out for two or three months to try and get that maximize rent, but if you lose two months of rent, you just killed the whole time that you waited-

Matt Andrews: You’ve got to wait for a lot more to make that up over years’ time.

Matt Theriault: Exactly. So I put a lot of faith in them there, but the one thing I wanted to point that you’re talking about a $35 increase, a $55 increase and that might not be a lot or sound like a lot, but I want people not to look at it from the dollar sign because this is how I keep my portfolio growing and growing and growing when you talk about I keep analyzing each piece of how hard is this money working? How hard is this money working? And so just a $50 a month, so you have a hundred-thousand-dollar house … we always keep our examples there so we can stay congruent, so $100,000 house, you got $20,000 into it. That would count the money you have into it plus your equity. So that’s how much you have into that property, and you got debt service on that. And say it rents at $1,200 a month, right? That is going to produce after debt service in 19% cash or return, the cash on cash return 19%. Just by increasing that rent by $50 a month, going from 1200 to 1250 which doesn’t seem like a whole lot of money, but that increases your return rate by two points. It takes you from 19% to 21%.

Those small little increases in rent really have a significant impact on your return, how hard your money is working for you. And that’s the number that I really like to focus on while I’m building my wealth because I’m not done yet. I know, Matt you think I’m disgustingly independently wealthy but I’m not done yet.

Matt Andrews: I think you’re disgusting, I didn’t know about … no, I’m just kidding.

Matt Theriault: So, I’m still building, so I have a philosophy that I want to leverage as much as I possibly can while I’m building. And I measure it that growth and how fast my wealth is building by what the return is, that lose percentage points, not the dollar amount. I look at the percentage points to see how hard my money is working and I know those little, just a $50 a month on one property raises me two points on my return. I want people to look at that-

Matt Andrews: And that times 10 or times 20 or times thirty.

Matt Theriault: Exactly.

Matt Andrews: That’s a big chunk of change.

Matt Theriault: And even if I just raise it $25 which would seem so insignificant, it’s still went from a 19% interest rate to a 20% interest rate if you include the bank terms. You look at people when they’re getting their financing done and they’re negotiating over a 4.3% a bank loan and a 4.5% bank loan, and you go, “Oh, this guy’s ripping me off, he’s charging me 4.5, I get 4.3 across the street.” And raise your rent 25 bucks and just dropped it down to 3.3%. You dropped it a whole point by being able to do it this way.

So, don’t trip over the nickels, don’t trip over dollars to pick up the nickels. So just use your leverage, get the best rate you can but don’t let that be the deal breaker, you can make up with a $25 increase in rent.

Matt Andrews: That’s it, guys. And you’re always looking for ways to finally tune that portfolio, you’re always looking for ways to increase those percentages like you said, and that takes working with the right managers in the right places and watching over what they’re doing. Good ones will sometimes do that stuff on their own, but sometimes even good ones need a little suggestion and say, Hey, have you looked at these 10 or 20 that you’re managing over here? Could we do a round of raises there and get me to that percentage that I’m thinking about?” And then obviously a good manager is going to help you figure that out, help you do that market research, help you figure out the tactful way to do it.

But these have just been some good practices for me and especially when I was first starting on rental properties early on and just had one or two or three or four and it was really living kind of hand to mouth cause I was trying to put away properties but I really didn’t have a ton of breathing room there, man, that extra $25 times four, that was $100, that was money, money is money, right? Whether it’s a $10 or $100 or $1 million, every little bit count. And I’ve always found that the money is lost and many times made on those little tweaks that have kind of an overall effect on your portfolio, and that’s what I’ve always focused on. So, should you raise rents? Yes, absolutely. Should you do it at the detriment of losing good tenants at a bad rate? No, you’ve got to do it the right way, but you should definitely be looking to maximize the value of your property and the highest and best use of that property, your time and your money, all the time.

Matt Theriault: I’ll close it out with this, it goes both ways too, you can look at your expenses on the properties the exact same way, from someone who owns over a hundred units in multi-family. If I can chop down the grass guy, the lawn cares down a hundred bucks, there’s a hundred dollar raise I don’t have to do now in my rent and I’ve got-

Matt Andrews: Changing insurance companies.

Matt Theriault: Changing insurance companies absolutely-

Matt Andrews: Across the board and knowing that you’re getting a similar coverage but it’s costing you a hundred dollars less a year on each property or something, times 10 properties times 20 properties, times 30 properties. Guys, that adds up so fast, it really does add up and you don’t know it until you kind of look at all the numbers when everything shakes out at the end of the year and you look at your taxes, but you can attribute a big piece of the increases, if you’re managing your portfolio correctly to those little changes. So, got to do it.

Matt Theriault: Then you bring in the evaluation of your property per the cap rate by doing those little adjustments. That’s tens of thousands of dollars in value-

Matt Andrews: It’s fun to pop into the performer.

Matt Theriault: There are two more episodes right there, so let’s wrap that up. That’s it for today. Flipping houses can make you rich, holding them will make you wealthy. We’ll be back next week until then, remember, don’t wait to buy real estate, buy real estate and wait.

Speaker 1: Hold that house.

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