I see it all the time… rental properties come to us with a current rent of $20, $30, or $50 lower than it should be. Why is that and why are property managers NOT keeping the rent on properties they manage at market rates? The answer is a phenomenon I call “Rent Increase Inertia”.
As a landlord of many years, I was frequently mift to find out – whenever I had a chance to look into it – that my rent hadn’t been increased in years and was losing money. And when I would question it, my property managers would always offer all kinds of reasons why we shouldn’t be putting the rent up…. “It’s a good tenant”… “There is an oversupply of properties in the area”…. “The market is bad at the moment”…
Only when I became a property manager a few years ago, I started understanding a bit better some of the reasons why there was resistance. But let’s start at the beginning.
Rent Increase Inertia
The image below is a de-identified extract from a routine inspection we completed for a property we started managing recently. As part of our routine inspection, we always conduct a rental market appraisal to make sure the rent is on par with market conditions. In this instance, our newly acquired property, was an apartment on a highrise. Great little 1 bedroom property, occupied by a long term tenant who is looking after the property well.
The property is rented for $400/week and is on the 14th floor, with some spectacular views. A quick inspection of the market, showed that 2 other apartments were advertised on the same complex, both on lower floors and with not so great views. One of the apartments is advertised at $430 and the other at $450! The one advertised for $450 was IDENTICAL to our property but 6 floors lower.
When I looked at the ledger we received from the previous agency, I realised that the rent hadn’t been increased in years! Our client was losing as little as $20 a week ($1040 a year) or as much as $50 a week ($2,600 a year)! This phenomenon by which Property Managers don’t keep up with rent reviews/increases I call “Rent Increase Inertia” and sadly, I see it regularly on the properties we inherit from other agencies!
“Rent Increase Inertia” is the phenomenon by which Property Managers fail to keep up with regular rent increases costing landlords thousands of dollars in the long run
To be perfectly frank, I hate “Rent Increase Inertia”… I hate it because our aim is to always be “fair” when we set and recommend our rent increases. “Fair” based on market conditions…. Fair for the tenant (who we understand has to make ends meet) BUT also fair for the landlord (who we know has a mortgage to pay). So when we inherit properties, like this OR another that came to us recently whose rent was actually $80/week below market rate ($4,160 a year!!!), we have an obligation to try and bridge the gap as best as we can. Unfortunately, when the gap is too big, the increases need to be a lot more aggressive than normal. And tenants don’t like aggressive increases, and quite often decide to leave! When that happens, tenants “lose” as they have to move from a property they were happy with, and the owners “lose” as it will cost them even more $$$’s between having a vacant property and having to pay us letting fees! Not good for anyone!
The question then is why are Property Managers fall into “Rent Increase Inertia”?
There are many reasons but in my experience, most of the time it comes down to TWO.
1. The first reasons relates to the relationship between Property Manager and Tenant. The longer the tenant has been in the property and the better the quality of the tenant, the closer the relationship between the Property Manager and the Tenant. The closer the relationship, the more likely it is that rents will be left unchanged for longer. Property Managers are human beings after all and as I often say “Property Management has very little to do with property and whole lot more to do with people and relationships“. Property Managers build relationships with people, just the same as everyone else. And the less problems they encounter with the tenant, the less likely it is for them to disrupt that relationship. Think about it… A Property Manager’s life is riddled with issues and issues create more work and stresses. So when a long term, model of a good tenant comes along, a Property Manager – often without realising it – will do all they can to not upset them. In fact, in my experience, Property Managers are far more likely to be aggressive with rent increases on a “bad tenant”, in the hope that they will get up and go!
2. The second reason relates to the size of the portfolio they manage. The bigger the portfolio a Property Manager is in charge of, the busier they are and hence the less likely it is for them to be diligent on their regular “rent review/increase” schedule. A rent increase is not as straightforward as it sounds and there is additional work involved, including dealing with the aftermath of a grumpy tenant (who has the right to refuse an increase as “excessive”, which will create even more work for the Property Manager). A lot of Property Managers are so busy with the day-to-day tasks, that they often neglect to fulfil one of the most fundamental of their obligations: Ensuring the Best ROI for the owners.
Property Managers fail to keep up with rent increases because they either don’t want to disturb the relationship with the tenant OR because they are just too busy
So what should agencies do to overcome the so called “Rent Increase Inertia”?
The best strategy and the one we have adopted with great results, is to have a policy which requires the review process to happen consistently, at specified intervals and the rent increases to be by “manageable amounts”. In other words, review at set intervals and by small amounts (a set percentage of the rent). That’s not to say that we would “blindly” just increase the rent. Circumstances change frequently – including the economy – so common sense should prevail, but at least there is a guide to follow and some of the ambiguity is removed for the Property Manager doing the review.
In my view, when it comes to Rental Increases, the best strategy is to adopt a policy that specifies the intervals reviews occur, as well as the increase – preferably by small amounts – as a percentage of the rent. That will remove a lot of the ambiguity.
Utilising available technology is one way to achieve the “regularity and consistency” aspect. All modern softwares these days, have a “Rent Review Reminder and Management” function that has the whole process automated: from kicking off the review at a specified time, to notifying the tenant and owner, and eventually adjusting the expected rent in the ledgers, as well as scheduling the next review. Most of the work is done by softwares, but Property Managers still need to use the functionality and, unfortunately, a lot – even these days – do NOT!
The human aspect on the other hand, is the hardest to overcome. In my experience, the best and ONLY way to protect the relationship between Property Manager and Tenant, is to set the right expectations RIGHT FROM THE START. If for example a tenant knows upon signing the agreement, that the agency’s policy is to review and increase the rent at a predetermined timeframe, then it will be easier for them to accept it. Of course, the biggest benefit of doing increases regularly and frequently, is that you can in fact increase the rent by “manageable/small” amounts which would not “break the bank” for the tenants. A $5 or $10/week increase on the average rent every few months sounds a lot better than $20 or $40/week every 2.5-3 years, and to be fair, in most cases, such a small increase is all required to keep the rent on par with the market!
Using technology to automate the rental increases process and setting up the right expectations at the start of the tenancy agreement, is the best approach for Property Managers to avoid “Rent Increase Inertia”.
What is the big deal you may ask… As a Property Manager and Investor myself, my view has always been that EVERY DOLLAR COUNTS – ESPECIALLY IN THIS PERIOD OF THE PROPERTY CYCLE WE ARE GOING INTO. Nowadays, a lot of investor loans are getting out of interest only and moving into principal and interest. On a standard $500K loan for example, the approximate increase in annual payments would be about $2,500! Wouldn’t it be nice if a part of that cost was covered by the rent? After all, keeping the rent at market rate – which is only fair to do – would minimise the impact of these increases on ones cash flow, which may just be the difference between managing to hold on to a property or selling it!
In this era of the property investing cycle we are going into, keeping you rent on par with the market, may be the difference between holding onto or having to sell your property.
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NextGen Property Mgmt (www.nextgenpm.com.au) is a boutique Real Estate licensed agency that specialises in property management. NextGen Property Mgmt does NOT has a sales team unlike most other agencies that specialise in Sales and have Property Management as a side business.
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