Many property managers take the path of least resistance when it comes to raising rent. I get it; raising rates is never fun, and you sometimes get pushback from tenants, but having strong systems and consistent processes in place makes it easier for everyone involved, and the payoff can be significant.
First, let’s clear up the issue of who you work for and who you work with. The tenants are your customers, but the owner is your client. Customers are people who pay rent. They’re important – we wouldn’t be in business without them – but remember, they selected the product you represent, they did not HIRE YOU. They are replaceable, and in fact, your job is to replace them when necessary. Clients are the people who have hired you for your professional services, and they’re not easily replaced. They are where your obligations lie.
The value of your property management portfolio is determined by several factors, and a huge piece of it is directly impacted by the return you generate for your clients. So many property managers believe the easiest way to increase the value of your company is through increasing the number of units you service, but the simplest way, and one that does not increase overhead, is to make sure your rents are at market rates.
You can rev up the value of your existing portfolio and here’s how we ensure we’re maximizing the rents for each unit.
Every good property manager knows that setting rental rates is both a science and an art. The science part gives you the range of rents based on location, size, amenities, etc. The art is knowing where your particular units should be placed within that range based on property condition, competition, and market trends.
It’s easier, of course, to just raise everyone’s rates by the same amount (“we’ll just increase by 10 percent this year”), but that can leave a lot of value on the table. We recommend that you make a careful evaluation each time a unit comes up for renewal and plan ahead.
Putting a strong system in place helps you keep up with this process. My company keeps very close tabs on lease renewal dates to plan the process at least 120 days from the time of lease expiration. This provides adequate time for the resident to give it some thought and notify us of their intentions before we would need to market the property. Not only does this keep everyone on the same page, but it also gives us time to plan for marketing and necessary turn work if the tenant doesn’t renew. Extensive planning is the key that’s allowed us to maintain the lowest vacancy rates in our market while achieving the highest comparative rents.
If they decide to renew, that’s great. We let them know that we’ll get back to them soon with terms (which we’ve already determined.) Meanwhile, we’ve also spoken to the owner about the unit. Are there any improvements that need to be made? Does he/she have an opinion on renewal terms, etc?
Renewals save the owner money. They don’t have to pay a leasing agent or pay for background or credit checks or cleanout fees, so there’s some inherent value there, and we can pass some of those savings on to tenants who are renewing. Everyone can come out ahead.
But, if a unit is going to turn over, it’s important to get the full value for it when the new tenant comes in. One reason is human nature; if you’re priced under comparable units in the area, a savvy prospective tenant will inevitably wonder what the discount might be hiding.
The second is purely financial, and you can help even renewing tenants understand the process more easily this way. When you renew a lease, you’re locking in your income stream for a year (or more.) Everyone knows that the cost of everything has been increasing dramatically over the past couple of years: equipment, supplies, parts, services, utilities, and labor. If you’re not maximizing value on each unit, you’re choosing to maximize your financial risk on each unit.
In the end, the value of a property management portfolio is based on the Seller’s Discretionary Earnings (SDE), the amount of money a buyer could expect to earn from the company yearly. Every dollar of earnings from every unit counts toward that bottom line, which is what multiples and offers to purchase are based on.
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About the author: Patrick Hurley
Maximizing rents is the most effective way to maintain and grow your company’s overall worth on the market. Smart property managers understand its importance and how to do it well.
He’s a Tallahassee native with almost 20 years of experience in the property management, real estate, construction, and business brokerage worlds. Having owned, operated, bought, and sold property management companies in the past, Hurley is in a unique position to help others in the industry find their exit. He’s been described as dependable, highly efficient, effective, and hard-working with a no-nonsense attitude. He takes pride in his professionalism and attention to detail and focuses on his client’s desired outcome.
Patrick still meets with every client and passes along as much knowledge as he can. He frequently gives back to the property management community in the form of professional speaking and value-packed article content. When he’s not helping others with a business transition, you can find him adventure-seeking with his young family.