This Is A Member-Only Page In the years BC, (before Carter and double digit inflation) rent rates were usually a simple factor of a property's value. Therefore, determining likely rents was relatively easy. A typical one or two family home rented for about 1% of the fair market value. For example, a $50,000 home would rent for about $500.00 a month and the tenant was responsible for all of the utilities and minor maintenance.
A rule of thumb for multi-family housing was that gross monthly rents should equal at least 1.3% of the value of the property. That is the inverse of a formula that was sometimes used to determine the value of income producing property called the Gross Rent Multiplier.
The best guess estimates that were used back then also factored in a decent cash return on investment when an 8 to 10% return was considered acceptable. However, the rising property values and interest requirements that resulted mostly from inflation, significantly outstripped a tenant's ability to pay in many areas. Landlords found themselves owning a property worth perhaps $100,000 on paper that could only be rented for $600 per month. Investors soon discovered that property value bears little relationship to the amount of rent that tenants can pay. Rental housing return is always market driven because vacancies don't pay anything. There are as many misunderstandings about how, when, and why landlords raise the rent, as there are misconceptions about landlords. Certainly, in a free market, competition is the most important single criteria. However, in the real world, (at least that of low and moderate income property) government now plays the major roll in setting rental rates.
Most of the multi family housing that has been built in urban areas of the US for the past ten years has been economically feasible only with substantial governmental subsidies. See our report on Cost vs. Value.
HUD now sets the rent for most rental housing built or renovated since the 1986 tax reform act. Tenant based Section 8 certificates and vouchers are also tied to what HUD determines is the fair market rents is each community. And today, 25 percent or more of many community's one and two family rental units are occupied by Section 8 subsidized tenants. In the private sector realistic rent increases must go past gross scheduled rents, right to the bottom line. All that really matters is the NOI. (net operating income) of a property that is a factor of gross rents, less: uncollected rent, taxes, government fees, insurance, maintenance and repair.
But then there are always the substantial turnover costs like: vacancy loss, redecorating. advertising, marketing and rental agent fees, which have to be deciding factors when landlords risk sending tenants looking by raising their rent.
There are various methods and beliefs on how to attain bottom-line performance. Some advocate that if stable occupancy is too high, then rent rates must be too low. This approach must also consider what impact a rent increase will have on current leasing levels and resident turnover because higher turnover decreases profits dramatically.
But, if market demand is strong, and the increase sufficient, the differential may well increase NOI. In the process, the improved rent schedule will build a greater income stream into the future, thereby increasing the value of the property for borrowing purposes and possible sale. But the decision on how often, or how much, rents should be raised cannot be reached by using simple formulas any longer. Rent rates always depend on several factors: Rental rates, like most prices in a free market, act like water and seek their own level based on supply and demand. But today, tenant demand for a given rental property is an absolute factor of the income in the area, and therefore tenants ability to pay. Back in the days that landlords could use a rule of thumb, like those described above, to determine property value and set rents, they also considered 25% of a person's income to be the maximum that could realistically be paid in rent. Today, tenants often have to pay 30 to 40 percent or more to find decent housing.
When considering how much rent you can charge today, the most important factors may no longer be competition or marketing, but what government will allow under rent controls or Section 8, and literally what the tenants in your market have the income to support. A landlord's success now depends on whether he is capable of finding, fixing and providing rental property profitably, at rents determined by forces that have little to do with a free market, or landlord's cost of doing business. Average annual apartment rents in 1998 were $12.78 per square foot, up 7.8 percent over the previous year. That means a typical 900 square foot, two bedroom bath and a half, rented for about $958 a month. Is that what you are getting? Rent Control obviously effects everything you do in those cities that maintain government controls on the amount of rent that can be charged. Some states, like Massachusetts, have recently outlawed the practice, others have forbid it entirely. A few still allow it in some cities.
See several pages on the subject, including most of the existing Rent Control Acts in our Property Management Web available to supporting members. Determining Market Rents. You can hire a real estate appraiser or broker to determine the market rent for a particular property, but it is relatively simple to do it yourself. Simply put, you see what properties that are comparable as to type, location, and condition are renting for. Call on signs and follow up on newspaper ads. Pose as a prospective tenant if necessary to get details of available unit, even scheduling showings to determine interior conditions of similar properties. If nothing else, for vacant units, look in the windows. |