I was talking to a couple at one of my Friday night open houses that I hold for subscribers to my newsletter and seminar attendees. He was bemoaning the fact that his rentals were not making any money at all after paying for management. He had neither management skills not any desire to manage his properties himself, and was frustrated because he couldn’t get his manager to raise the rents. He could have easily fired the manager, but was afraid he couldn’t replace him with anybody who would be any better.
Lack of cash flow is a common problem with a lot of investors who hire management companies. When you take 10% off the top of rents for management, that can make the difference between profit and loss for the year. The only way to make up for this is to reduce vacancy, turnover, and maintenance, and to keep rents at current fair market levels.
The reason managers don’t raise rents boils down to arithmetic. If they keep rents at current levels, they reduce move-outs, and keep rental commissions coming in with minimum effort. If they raise rents, they’ll only increase their commissions marginally while the landlord will get the benefits of any rent raise. At the same time, if the rent raise causes tenants to move out, not only will their commission income stop for a time, they’ll also have to oversee the refurbishing of the rental unit and go through the effort to rent it up again. With this in mind, managers are quick to caution owners about raising the rents; and consequently, owners become afraid to take the chance of increasing vacancies.
When this logic is applied to several houses, owners could be losing a lot of money over the years because they aren’t demanding that their managers charge fair market rents. For example, if $1000 rents could be raised 5% per year, and instead they are not increased; then a 10-house portfolio would lose $6,000 per year, each year, simply because the manager didn’t keep rents rising at market rates.
I stopped using “managers”. Instead, I find investors who already manage their own portfolio and get them to LEASE my houses for 90% of the current rents. Then, each year, we get together and figure out how much we can raise the rents for both the houses that they own and the houses they lease from me. Then we raise all the rents at the same time. We also let other landlords know what we’re doing so they can raise their rents to. The net result is that tenants have few choices but to stay where they are and pay the increased rents. This isn’t to say that we are rent gougers, we are simply making certain that our occupants pay our costs and a fair rate of return on our investments. You should be doing this too.