Landlords - rule of thumb for increasing rent?

[brucethebroker]

Fair enough.

 

[ASung90s]

Landlord's house is no longer filthy but his tenant has cost him money for those repairs and improvements. His place is now in better shape than it was when the existing tenant moved in. Shouldn't it rent for more? The existing tenant has cost him money that he didn't expect to spend. Maybe he wants to ride that rent pony for a while without alla time taking it to the vet and groomer.

Exactly - the house wasn't in good shape when initially placed on the market. Now that it is ready to rent for closer to market-rent, why wouldn't the landlord want to do it?

The fact that the existing tenant helped to identify issues and was patient through the repair/refurbishment process doesn't make any difference to the landlord. The tenant already benefited from the $250-below-list rent for the past lease period. Going forward, the landlord should go ahead and charge what the market will bear.

 

[Bongleur]

It's not your house or money,(unless i missed something) you should be what's best for your mother not you.

Its family money. One pot with different pockets. One of my duties is to maximize it over the long term. Optimizing the timing of various options is part of the process.

 

[Bongleur]

FYI last week I picked 4%. We'll see what happens.

Tax returns came back. Last year, with what I think are higher than average expenses (but I need to go back & chart this for every year...) the expenses were 59.27% of rent received. But that includes depreciation expense, which is really a phantom loss when I inherit with a step-up. Wish I could depreciate it faster !!!

Check my logic:
Rents Recd $29,880
Cash Expense $12,169 ie not including Depreciation Expense
True cash in pocket = $17,711
True % yield on Rent Recd = 59.27%


True % yield on Rent Recd versus Net Proceeds if sold (10% expenses on market price) = 3.748%


See, my tax return does not tell me this because it folds in paper depreciation. It does not tell me my "net cash in pocket."



So is this a good RISK ADJUSTED return?
What are the risks:
1) un-occupancy risk
2) real estate sales market risk
3) economy/recession risk of lowering rents
4) concentration of large fraction of portfolio in a single instrument & sector.

 

[clifp]

[SIZE=+1]https://www.zillow.com/rental-manager
[/SIZE]

[SIZE=+1]Has anyone "claimed" their property on Zillow? Wondering what downsides there are.[/SIZE]

I have claimed all my properties on Zillow. It is pretty easy to do.

I find the Zillow rent estimates to be virtually the same as my property managers gives me. (I know she uses some realtor function to give me comps.)

 

[Bongleur]

Gack. My edit to the above didn't take, I think I failed to successfully SEND so it expired.

Did a spreadsheet with all 6 years of rental data.
Cash in pocket is about 59% of Rents Received in 2018

If I sold the house & invested the net proceeds, I would need to make about 3.748% to equal amount of money.

The rent was at $2630 when the first tenant left.

After 3 months empty, agent dropped price to $2490 (from what I don't recall) for a 2 year contract.

Now I'm wondering why the agent both dropped the price and gave 2 years at that price instead of 1.

 

[NgineER]

If I sold the house & invested the net proceeds, I would need to make about 3.748% to equal amount of money.

I would sell the house and invest in the market. Not worth the hassle to only beat 3.75%. You’d want a return over the stock market average IMO.

 

[Another Reader]

I would sell the house and invest in the market. Not worth the hassle to only beat 3.75%. You’d want a return over the stock market average IMO.

The return is comprised of two parts, net cash flow and appreciation. OP is saying his cash flow according to his calculation is 3.75 percent. That's his "dividend." Presumably there is some appreciation. The annualized rate of appreciation is the same as the capital gain in your stock. If prices are increasing at 3 percent, the return is 6.75 percent. Not great, although there are tax benefits to the income that are not included in the calculation.

 

[SmallCityDave]

No rule of thumb it's whatever the market will bear, I just increased a rental 28% last week... I was under market value.

 

[NgineER]

The return is comprised of two parts, net cash flow and appreciation. OP is saying his cash flow according to his calculation is 3.75 percent. That's his "dividend." Presumably there is some appreciation. The annualized rate of appreciation is the same as the capital gain in your stock. If prices are increasing at 3 percent, the return is 6.75 percent. Not great, although there are tax benefits to the income that are not included in the calculation.

I am in flyover country and don’t count on appreciation for my rental purchases (but it is gravy). I need at least 6% return on my investment, assuming 50% of rent goes to expenses over the long term, with the ability of going to 10%. More preferred stock than common stock analogy.
I think you are in the Bay Area and that appreciation is expected there.

 

[Bongleur]

The return is comprised of two parts, net cash flow and appreciation. OP is saying his cash flow according to his calculation is 3.75 percent. That's his "dividend." Presumably there is some appreciation. The annualized rate of appreciation is the same as the capital gain in your stock. If prices are increasing at 3 percent, the return is 6.75 percent. Not great, although there are tax benefits to the income that are not included in the calculation.

Selling now costs a lot in taxes. So waiting to inherit avoids any tax, so thinking of that as appreciation makes some sense.


I guess the killer here is the 9% management fee. I could shop around for lower fees, but OTOH no way to really know if the quality would be adequate.

 

[Bongleur]

assuming 50% of rent goes to expenses over the long term

Is that a typical ratio for rentals? Are you including all expenses, like remodeling when needed & cost of empty months?

 

[Looking4Ward]

I promised I'd follow up on my previous post.

Got an offer from the owner to renew the lease for another year with no increase, despite what he stated was a 5%-9% year over year increase in local rental rates and increasing home prices and property taxes.

Because in his words "One of the reasons I opted not to require a rent increase is that you’re a good tenant, whom I very much appreciate. Who knows who I’d get the next time."

I may have offended him a bit when I then pointed out that I’ve been looking at the market for this zip code and that we are currently at $1.26/sf – the average for this area based on current listings has been trending downward slightly to $1.11/sf. The median is currently $1.21

That includes very nice properties in two more prestigious areas offered at $1.21 and $1.28/sf. This property comps at roughly the median value or $1.21/sf. My renewing the lease for another year would save $225 a month alone in listing commission. That was a delta of about $330 a month.

He sent me links that showed rents rising in the area. But I pointed out those were for apartments closer to downtown, not single family homes in this area. Ultimately we agreed on no increase for another year and he would arrange for repair or replacement of the stove and dishwasher and a pest control treatment.

 

[Sunset]

^^^^ Thanks for the follow up. Nice to get to the end of a story.

 

[Bongleur]

My tenant is leaving at the end of the month. Now, my management agent is telling me that she can't advertise one rate for a 12 mo and another for a 24 mo lease.

 

[JDARNELL]

My tenant is leaving at the end of the month. Now, my management agent is telling me that she can't advertise one rate for a 12 mo and another for a 24 mo lease.

You need a new agent then. It’s your property so do what you want. I have a unit coming up in June after a long term tenant decided not to accept a $25 month rent increase. So I will just turn it over and the rent will
Go up $225 back to market rate.

 

[pb4uski]

My tenant is leaving at the end of the month. Now, my management agent is telling me that she can't advertise one rate for a 12 mo and another for a 24 mo lease.

If it were me then she better have a great reason why.

 

[Bongleur]

If it were me then she better have a great reason why.

I'm guessing that the online MLS only has one box "rent" and cannot handle "rent for 12 mo" and "rent for 24 mo."


I suggested that there must be a general "comments" box to enter text.

 

[2177V]

Tenant's lease is coming up. Property manager suggesting a $50 bump on $2490. So about 2%. On a house in the DC area, on 1/4 acre, neighborhood built c1955, nice brick.


What's the current rule of thumb on rent as a % of gross income?


What questions should I be asking the PM ? --
-- if empty times have decreased since last lease signing
-- to check tenants financials to see what their number look like
-- how have rents been changing in the neighborood & vicinity

I was a landlord for many years and I always maintain rent of $50 below the market rate. Yes I lose $600 a year but my tenants tend to stay. If they move ....I end up paying $1000 to get another tenant. Generally it should be 30% of a tenant gross pay in their application. Other factors are ...did they pay rent on time? Did they take care of the property? Be careful on what the property manager recommendations if his fee is a percentage of the rent bc he wants a higher commission so there is a conflict of interest. The biggest savings is managing the property your self if you have the time and know how.

Yes you can ask those questions but usually I check the classified section of the newspaper or craigslist
To determine the market value of the rent. Good luck to you. Landlording can be both rewarding and frustrating.