I have been in the rental business for over 20 years now.
I bought my first investment property at 14 and grew my portfolio to more than 50 properties worth over $10 million by the time I was 24.
10+ years since then, the portfolio spanned multiple states and includes office, multi-family apartments and many single family homes.
Over the years I have heard varying strategies on how to increase returns from an investment property. What I have learned is that most of these strategies don’t actually pay off.
Instead of getting lost in some fly-by-night, over-analyzed strategy of steady rent increases and high turnovers, or the debate on whether to do short-term vs. long-term rentals – why not keep it simple?
I've found some surprisingly simple ideas that have helped tremendously with growth, and after analyzing the data at TenantCloud over the last three years – it appears others might also find it beneficial to follow the same ideas.
Here three key takeaways worth noting that can help you make 15% or more on your rental.
1. Don’t Raise the Rent (Decrease Vacancy)
Rent has been rising in every market across the U.S. since 2012. This might seem like a continuous trend that should be in the lease agreement. However, raising the rent may also come with some unintended consequences that undermine the gains. TenantCloud’s survey of tenants show that the number one reason for moving to a new rental is because the landlord raised the rent.
Tenant turnover is a cost.
The average turnover costs by TenantCloud landlords’ was $1,800 (which is actually higher than my own personal portfolio average of $1,635). This isn’t a surprise to most, but in comparing my data to TenantCloud, I found another interesting similarity. Maintenance requests drop by 30% in the second year of renting and by over 50% in the third year for tenants who stay in their rental year-over-year.
Though we landlords would like to think our rentals are like wine and get better over time, the more realistic interpretation is that tenants tend to complain less, the longer they stay. This could imply that moving a tenant out has carries a bigger cost than just turnover costs.
With TenantCloud users in every city and town in the U.S. – it gives us a wide perspective on the topic of maintenance request costs, which totaled nearly $2,800 per year, per unit, on average.
When we look at leases that included a rent increase, the increase was about $75 total from 2015 – 2017. This was a total of 6.2%, with the average 3 bedroom single family home renting for $1,300 in November of 2017. Costs didn’t drop by 50%, but they did drop by over $600 per year on average. Average turnover was 14 months for landlords who increased rent.
In other words, in order to gain $2,700 more in rent, the average landlord went through $3,600 in turnover expenses. Then saw $600 more in maintenance request expenses per year than landlords who didn’t raise rent.
Let's look at the numbers over a three year period…
3 year rent increase – ($75/mo x 36 months) = $2,700
14 months turnover (2 x $1,800) – $3,600
Maintenance Request – ($600 x 3 years) – $1,800
Net difference – $2,700
The average landlord who raised rent by over 6% made more in rent over the 2015 – 2017 time period ($2,700), but did it at the expense of $5,200, which is a net loss of $2,700 ($900/year).
In my experience, I too have seen this. I have avoided raising rent on any tenant who stays in a unit and pays on time and has few recurring issues. I have some rentals where I have not raised rent, and the same tenants have lived there for over 10 years. Those tenants pay on time, have few issues to report and make being a landlord an easy job. The longer a tenant stays in a unit without rent being raised, the more incentive they have to stay and be a great tenant.
For landlords who hire a property manager, you will also want to be aware that most property managers receive fees for turnovers. These fees can be for placing a new tenant, higher makeready costs and more. All of these additional items can easily amount to a much higher cost than if the tenant had just stayed.
This is an incentive for property managers to move tenants out often, and raising rent is one effective tool for doing just that. Knowing and understanding your property manager's policy for raising rent is an important part of selecting a property manager. You have the ability to require no rent raises for ongoing tenants.
2. Late Fees (Stick to the Agreement)
Late fees are in place for a reason. When a tenant pays late, it is frustrating and often a landlord or property manager will settle for just receiving the rent at all.
I understand that “something is better than nothing”, but in surveying tenants – late fees for late rent is an expected outcome.
In surveying TenantCloud tenants, 69% felt that paying rent late warranted a late fee of $25 or less. Contrast this with only 21% who expected their landlord to raise rent within the next 12 months by $25 or less.
Collecting late fees doesn’t have to be personal. Using online services to collect rent and automating invoices to tenants makes this process easy, automatic and puts the burden of paying the late fee on the tenant. In my own use of online rent payment tools, it did increase revenue from late fees, but eventually lowered as tenants created ongoing habits of paying rent on time.
In comparing TenantCloud landlord data from 2015 – 2017, landlords and property managers who started using online payments in 2016 and input tenant payment history for 2015, saw a 12% increase in late fee collections from late rent and a 14% increase from 2015 – 2017. This equated to an average increase in revenue of $125/year. Though this may not seem like much, if it is done through an online payment solution, it adds no additional burden for increasing revenue when tenants already expect it.
3. Allow Short-term Renting and Subletting (Roommates)
Finding a roommate or even letting others rent for the weekend can provide an additional revenue source for a tenant. Because of this, I have offered a new option for tenants who want to be part of short term rentals. For $50/mo, they are allowed to use their unit for short-term renting.
Many tenants will sub-lease their own living space as a short-term rental anyway, but if they are granted permission by their landlord, they can do it without fear of causing problems.
Tenants are also very willing to pay this monthly $50 fee to their landlord if they know it is an option. In cities like Austin, Texas (where many events take place), the fee is as high as $250 per month, because the tenant can get a few hundred dollars per night during the busy weekends. I have also heard of landlords allowing this option on a percentage sharing basis, but have opted to go with the flat, non-refundable $50 fee, paid to them by the tenant at the beginning of every month, along with their rent.
In addition to a flat $50 monthly fee, there are some additional requirements – like the tenant having renter’s insurance, their deposit is to cover “any and all damages”, and the occupants will agree to any special terms for that specific property (e.g. – noise constraints). There is also a stated penalty in the lease of $500 for failing to inform the landlord of a short-term lease.
Roommates are also a great way for tenants to lower the burden of rent, which can assist them in paying on time and in full.
Property managers and landlords alike should be able to approve who is staying there (which can come with a review fee). However, such legacy-rental-occupants can be like long term renters. College campuses have many roommate rentals with very low turnover costs. As roommates filter through each other, they leave a renting culture that is similar to a long term renter with little hassle, on-time rent and no turnover costs.
These three basic ideas for increasing your cash-flow don’t come with any special required tools or tax accounting tricks. Being a solid real estate investor means knowing who is renting your property and who your property managers are targeting. Make sure your strategies align. Being more hesitant to raise rent, being a stickler for late fees and open to your tenants finding new ways of paying the rent can all add up to higher net cash flow to you.
Joe Edgar is an experienced entrepreneur and investor, a member of the US Treasury SSBCI Venture Capital Working Group, co-founder of TenantCloud, a cloud-based rental accounting and management software company. Joe is also active in the community as a member of the Central Texas Angel Network and volunteers time with Community Tax Center helping low income families file their tax returns.