As Rents Jump, Landlords Ask How High

Investor's Business Daily

As residential rents rise around the U.S., landlords face a dilemma: How can they maximize their monthly leasing income but minimize tenant turnover and angst

That can be tough both for apartment owners and homeowners letting out their extra house or condominium. But a couple things work in landlords' favor: Falling vacancy rates are giving landlords an edge in negotiations. And as big property managers use sophisticated software to set competitive rents, with a little research smaller landlords can follow the trend to get good value from their properties.

Average rents across all types of residences rose 5.3% year over year in July, in an analysis by real estate website Trulia. And apartment rents lifted in the second quarter in all 82 U.S. markets studied by commercial real estate data firm Reis.

"These days it's clearly a landlord's market," said Reis Senior Economist Ryan Severino.

"I would expect rents to continue to accelerate this year," he said. "Demand is strong and new supply is not to a point where it's coming on line just yet.

Rental vacancy rates are as low as they've been in the last 10 years, notes Jed Kolko, Trulia's chief economist.

"The biggest rent driver right now is job growth and low vacancy rates," he said.

What's driving demand? The housing bust resulted in many distressed homeowners moving into rental properties when they could no longer afford the mortgage. Also, potential homebuyers don't yet trust that home prices are headed up for the long term. Further, many folks don't have the hefty down payments and clean credit to qualify for mortgages under today's tight lending standards.

Leasing Is, Well, TrendyLifestyle shifts also are contributing to rental demand. "We have the highest ratio of 25- to 34-year-olds living at home since the Great Depression," said Greg Leisch, CEO of real estate research firm Delta Associates. And adults are coupling later in life, resulting in 2010 having the highest fraction of single-person households in the U.S. Census Bureau's history, he says.

"You combine those factors with the preference that the X and Y generations have for urban living ... along with uncertain economic times," Leisch said, and all of that amounts to lower homeownership and more renters.

What mistakes do landlords make when raising rents? At the top of the list is not knowing state or local restrictions on how much rents can be raised and how notice must be provided, says Brian Davis, the vice president of ezLandlordForms.com.

For instance, he says, Baltimore City, Md., requires 60 days notice to raise the rent. And in California, the amount of notice required depends on the length of the lease term and whether the rent is government subsidized.

For month-to-month leases, and leases under one year in term, 30 days notice is required for a rent increase, Davis notes. But for lease terms over one year, 60 days notice is required in California and for subsidized housing, 90 days notice must be provided, he says.

An ezLandlordForms.com subscription starts at $25 for two weeks, including rental rules information and access to forms.

The second mistake that landlords make, according to Davis, is not understanding that seasons of the year do matter.

He says that raising the rent in spring or early summer is advisable, as more tenants move during the summer months. That way if a tenant decides to leave, the landlord may be able to fill the vacancy quicker and more easily.

After researching to make sure a rent increase is justified and that a rental unit is competitively priced, Davis says initially notify the tenant in person or by phone.

"It's only courteous to give your tenant a heads-up," he said.

Then follow up with an official letter. A visit could also let the landlord see the property and make sure it's being properly maintained.

Rents: When To Hold ThemWhen the tenant's a good one, Davis says, a "longer lease is often more valuable than higher rent.

So landlords may offer a longer lease instead of a rent increase, or a lower increase in combination with a longer lease.

Figuring out what the rental market will bear has gone through a metamorphosis. Property managers now are deploying sophisticated software to help them set rental rates, sometimes on a daily basis.

Kevin Sheehan, a managing director at real estate management firm Greystar, says his company currently uses YieldStar by RealPage (RP) to manage revenue at 140,000 apartments. Greystar, headquartered in Charleston, S.C., manages about 200,000 apartments across the U.S.

Sheehan says YieldStar helps his company "make the right pricing decisions.

"In the old days, we set rents based on what we thought competitors were doing up the street," he said. "With YieldStar, you have a sophisticated system that helps you aggregate all the factors that impact how the rent should be set ... seasonality, demand for certain types of apartments and the impact of what competitors are doing.

How Large Landlords Price Using the system, Greystar can flex its leasing periods "from nine to 15 months" to offer multiple prices, which can benefit tenants, he says. But Sheehan adds that this also aids owners by ensuring a property isn't hit with too many lease renewals at once.

Sheehan says apartment managers have a say in rent decisions and can overrule the software when they feel other factors need to be considered — such as high or low demand for a particular type of apartment.

Cindy Clare, president of Kettler Management in McLean, Va., says her company uses both YieldStar and Rainmaker Group's Rainmaker LRO (lease revenue optimization). Kettler manages retail and office space and more than 19,000 apartments in 85 communities, many in the Washington, D.C., area.

Clare says the software lets her company track apartment demand, including the number of emails, calls and visits. And Kettler uses the software to flex lease terms. But Clare also cautions that the software is only as good as the data you put into it.

One mistake she sees property owners making is not being willing enough to have some vacancies in order to optimize rents.

"If you're at 97% or 98% occupancy, your rents are probably too low," she said.

However, all top property managers are closely watching today's apartment market, as new rentals are set to come on to the market at the end of this year and into 2013. In the Washington, D.C., area alone Leisch expects 6,000 new units to be finished by year-end, which could cause a market disruption. Other cities also are seeing an apartment building boom.

As new units become available, Sheehan said, "concessions (a free month's rent or other incentives) will come back, but we think demand will still be there."

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