Apartment owners naturally want to earn higher returns on their investments, and though lower operating costs can be a good way to achieve that objective, it’s equally important to take advantage of opportunities to raise rents.
“You always try to increase the rent roll because that increases your return on your investment,” said Erez Eliahu, a principal of Blue Star, a property ownership, investment, and management company in New York City. “That is what you are waking up every morning to do.”
Market data determines increases
The ability to raise rents rests on accurate information about comparable and nearby apartment communities, which represent prospective tenants’ other housing options.
To find out about comparable communities, get a map, drive up and down all the streets within a one- or two-mile radius around the subject building and identify all the apartment communities within that area. Visit each of the buildings or call the owner or manager and ask for information about the amenities, asking rents, lease terms, and concessions that are being offered.
Competitors usually are willing to trade such information with one another, managers said.
“Go in and act as if you are going to be a renter or tell them straight off who you are and what you are after when you walk in the door,” said Carl Hardee, president of Lawson Realty Corp., in Virginia Beach, Va. “For the most part, everyone will share gladly with you.”
Other sources for this type of information include apartment associations and apartment advertising guides, which can be found in news racks at grocery and convenience stores. Talk to marketing representatives who sell advertising in these guides because they are eager for new business and can be a good source of competitive information, Hardee suggested.
Next, organize the information into a chart that lists the amenities and rents of each comparable property in the local market. Adjust the rents upward or downward to account for the estimated market value of each additional or missing amenity compared with the subject property, then compare the adjusted rents of the comparable properties to the subject property to determine likely market rents. For example, if the subject property has one-bedroom and one-bathroom units, but an otherwise similar property has one-bedroom and two-bathroom units, the rents in the matrix should be adjusted to reflect the value of the extra bathroom, Hardee explained.
The difference between the market rent for an apartment and the actual rent the existing tenant currently pays for that apartment is the “loss-to-lease” amount, which represents an opportunity to increase the rent when the lease is renewed, according to Craig Rooney, regional vice president of business development at Western National Property Management in Irvine, Calif.
For example, if a renter signed a one-year lease to pay $1,000 per month for an apartment and six months later market rents for similar apartments were $1,050, the difference of $50 per month would be the loss-to-lease amount for the second half of the lease term.
When turnover risks are high and apartment demand low, landlords have less ability to capture the loss-to-lease amount than otherwise.
Landlords in markets with significant seasonal differences can strengthen their negotiating position by setting move-in and renewal/lease-expiration dates to coincide with periods of high demand for vacant units relative to the supply in the marketplace, Rooney explained.
Buyout overcomes rent control
The loss-to-lease amount may be especially large when rents are capped or controlled by law over a long period of time. Yet owners who have rent-controlled units aren’t without options, which might include buying out certain tenants, making capital improvements, or taking a hard line against illegal subletting.
Blue Star recently paid an elderly woman $50,000 to surrender a Manhattan apartment that she’d been paying $386 a month to rent, according to Eliahu. The tenant relocated to live near her daughter in Florida, and Blue Star renovated the apartment, which now commands $3,500 a month in rent. In this market, the $50,000 buyout was “a good investment,” he said. The company will recoup that amount in 16 months at the new rental rate.
Nicer buildings attract better tenants
Making physical improvements or adding amenities to an older building can be a good way to generate higher rents, depending on the location of the property and the cost of the alterations. Some of the many possibilities that may justify higher rents include: replacing the roof, renovating hallways, improving the boiler, changing the main door, replacing the tenant mailboxes or the buzzer system, adding terraces, placing laundry machines in an unused basement, hiring a doorman, or installing an elevator. A new elevator could turn a $2,000-a-month sixth-floor walkup into a $3,000-a-month penthouse, Eliahu explained.
Apartment communities also can benefit from fresh paint, a recoated parking lot, attractive landscaping, and other curb-appeal upgrades that make the property more attractive to prospective tenants who can pay higher rents for those amenities, Hardee suggested.
If the local rental market is strong, investments in improvements and amenities can pay off in terms of higher-paying tenants and fatter rent rolls.