Should you raise rent to market rents if there is a strong risk of losing a renter? The market is hot, vacancy is low and inventory is low. It is easy to forget there are times in the market that getting a keeping good renters is difficult. Depending on what your goals are, sometimes it is worth considering if keeping that renter while “losing” rent due to loss to lease is worth it. In this article I will outline what the potential costs of a renewal vs. a new tenant are. What is a renewal worth?

On the flip side. What if your goal is to quickly flip the property. Buy, invest, raise rents and sell. There is nothing wrong with that, but while you hold the property it is still important to know what some of the potential costs are of a renewal vs. new tenant.

Renewal vs. Vacate Scenario:

Current Rent: $1,135

Market Rate: $1,250

5% increase = $1,191.75

Are you going to increase the unit to its market rent of $1,250? Here are some costs to consider when evaluating whether or not you should take the 5% hit.

Self-Managed Property

***Assumption: for all hours, we will use $50/Labor Hour***

Renewal:

  • 2 Hours’ time to negotiate, draw up and sign the lease renewal = $100
  • Lost rent assumption: ($1,250-1,191.75)= $58.25 * 12 Months = $699

Total cost for a Renewal (including lost rent):
$799

Vacate:

  • 2 Hours Initial renewal negotiations: provide paperwork for intent to vacate and process paperwork = $100.
  • 2-4 Hours to market property: drive to property, take pictures and list property on Craigslist and other marketing sources. Many free options, so I will not include the cost of marketing sites = $100 – $200.
  • 2 Hours to coordinate showings: Coordinate with current tenant – 24 hours’ notice, prescreen the potential renters. Text, phone calls, e-mails = $100.
  • 3 Hours to show property: Text/Call potential tenants to confirm showing, drive to property, pre-walk the unit and show property to potential renters. Try to get as many showings with an hour time span with each showing lasting about 15 minutes = $150.
  • 2 Hours to process applications: Hopefully you’ve received multiple applications, if not, repeat the previous three steps. If you have received an application, process immediately. Credit check, back ground check, rental verification and income verification. 1 Hour/Potential tenant with average of 2 tenants = $100.
  • 1-3 Hours to convert to tenant: approve tenant, draw up lease and sign. If you have the right processes in place, electronic signatures specifically, will save time. If not and you have to schedule an appointment to sign with the tenant, this step could take 3 hours = $50-$150.
  • 2 Hours to checkout out old tenant: walk through unit comparing the move in/move out form. Schedule work that needs to be done. Steam clean, touch up paint, flooring, maintenance etc. = $100.
  • Work to be completed: Paint every 4 Years@ $500/Unit; Carpet every 5 years @ $2,000/unit = $2,000. Miscellaneous maintenance – locks changed, drywall patch, bulbs changed, new blinds and labor $300. Cleaning of unit $150; Easy year turn (no carpet/paint) = $450; Carpet and Paint year turn: $2,950. ***It is very possible the tenant moving out may be responsible for some of these costs if the repair/maintenance is due to neglect/misuse.***
  • 2-3 Hours for final walk through/check in new tenant: walk the unit prior to move in to ensure all work has been completed. Accept 1st month’s rent in exchange for keys = $100-$150.
  • 5 Days of Vacancy – Days between when old tenant moves out and new tenant moves in. Median Rent $1,250/30 = $41.67 * 5 Days = $208.33

Total cost for a new move in:
$1,458.33 to $4,208.33

Professionally Managed Cost:

Renewal Fee:

  • $200-$350
  • Lost rent assumption: ($1,250-1,191.75)= $58.25 * 12 Months = $699

Total cost for a Renewal (including lost rent): 
$899 to $1,049

New Lease Fee:

  • 50-75% of 1 month’s rent (Median rent of $1,250) = $625-$937.50
  • Work to be completed: Paint every 4 Years@ $500/Unit; Carpet every 5 years @ $2,000/unit = $2000. Miscellaneous maintenance – locks changed, drywall patch, bulbs changed, new blinds and labor $300. Cleaning of unit $150; Easy year turn (no carpet/paint) = $450 + 10% mark-up = $495; Carpet and Paint year turn: $2,950 + 10% markup $3,245 ***It is very possible the tenant moving out may be responsible for some of these costs if the repair/maintenance is due to neglect/misuse.***
  • 5 Days of Vacancy – Days between when old tenant moves out and new tenant moves in. Median Rent $1,250/30 = $41.67 * 5 Days = $208.33

Total cost for new move in (Professionally managed):
$1,328.33 to $4,390.83

What was the difference of getting 5% or 10%? $58.25/Month or $699/year. But it would not be fair to only include cash flow.

What would the $699 of increased rent due to the calculated value of the property using a 6% cap rate? 11,650.00 of increased value!

GOALS, GOALS, GOALS. What are your goals? Are you planning on selling the property in the next year or two? That 10% increased rent may well be worth the cost if you have to get a new tenant. Even at the high end of a new move in of about $4,250, your additional cash flow nets you a loss of only $3,551. It then generates an additional $8,099 if you sold it.

If you are planning on keeping the property long term. Is the $699 worth of additional cash flow worth the $1,390 roughly of costs to turn the property over? That would be up to you to decide.

Some renters will move regardless of the price because of life’s circumstances. They have graduated, are moving out of state or maybe in with their boyfriend or girlfriend. These decisions from the renter are completely out of your control, no matter what renewal rate you set.

Industry standards for standard renewal rates are 40-60%. Meaning that every year you should have about 40-60% of your units turning over or vacating. That takes into account the people who would be moving regardless. It also takes into account increasing rents to increase NOI (Net Operating Income) and assuming this will force some tenants out. Statistics are a great yard stick to measure how you are doing. They are not law. Some owners want to have 98-100% occupancy and keep rents lower to ensure those numbers. Other owners (your “typical” institutional owners) will suggest a 95% occupancy level suggests the proper rental amounts to ensure highest possible NOI.

Again, what are your goals? Those are what should dictate your actions. Highest rents, highest NOI, 5% vacancy, sell in 5 years? Or 100% occupancy, strong NOI, 2% vacancy and hold as a legacy property? There is no right solution, but above will help you understand some of the potential costs of a renewal vs. a new tenant.

Posted by: soukuppm on May 23, 2018
Posted in: Uncategorized