Increase Your Rents
May 11, 2018
The topic today is to increase rents or not increase rents, that is the question.
I’ve met with and spoke to many apartment building investors, in both rent controlled and non-rent controlled neighborhoods, that have decided not to raise rents over the years for a multitude of reasons. Some reasons I’ve heard of why not to raise rents are:
- I really like my tenants, they are like my kids
- I don’t want to raise rents because my tenants may move
- I don’t want the trouble
- I bought the building 40 years ago for $30k and I don’t need the money
Whatever the reason may be, a few bucks here or there can really add up over the years and as you and I both know, apartment buildings are primarily valued based on their income.
Let’s look at a really simple example:
10 unit building
Owned since 2000
All one bed, one bath units
Located in a decent neighborhood of San Diego
When you bought the building it was generating $70,000 in gross income.
Maybe back in the year 2000, an extra $120/month wasn’t a big deal. Or maybe the economy was down. There are a multitude of reasons of why not to raise rents, though for this exercise, we’re simply going to talk about when the time comes and you can raise rents, please do the increase and here’s the math on why. This way, next time you sit down with your apartment building broker, you won’t both be disappointed with the value of your property or struggling to accept why your apartment building is work $200k less than the guy next door.
As you can see from the illustration above, over a an 18 year period:
- if you were to increase your rents 2% each year, you would earn $1,600,000 in gross income over the 18 year period and your building would be worth $1,500,000 about with a 15 GRM which we will use for our example
- if you were to increase your rents 3% each year, you would earn $1,760,000 in gross income over the 18 year period and your building would be worth $179k more at a value of $1,790,000
- if you were to increase you rents 4% each year, you would earn $1,940,000 in gross income over the 18 year period and your building would be worth $2,130,000 at a 15 GRM
So as you can see above, if you keep up the work on your building, maintain it, upgrade and renovate to attract high paying and good quality tenants, then you can substantially increase not only your income and the total value, but the income and value for your heirs when they inherit the building.
This is a very simple example that has a lot of variables obviously though the point should come across pretty clear as why not to miss an opportunity to increase rents if the end goal is to maximize your investment potential of your apartment building asset and make the most money possible on your investment property.
For an evaluation of your building contact Eric von Bluecher here or call 310-900-9505.