Epic Real Estate Investing - How to Raise Rents | HTH029 | 603

Episode Date: March 6, 2019

Today, we are speaking of raising rents and giving you the strategy that will allow you to increase your lease number, keep your tenants and maintain a credible relationship with them. This is an important topic not only because it’s about accumulating dollars but because it’s a way for investors to improve their portfolios. Learn why you should know the market before raising rents, how to do it, and what the impact of small increases on your return is. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Don't wait for appreciation to buy real estate. Buy for cash flow and wait. In other words, Hold That House! Your host's Matt Andrews and Matt Terrio. Hey, flipping houses can make you rich. Holding them will make you wealthy.

This is the Hold That House show, and I am Matt Terrio. And over there is Mr. Matt Andrews. Great Scott. And before we begin, I always get energized after you drop in, have your drop over there. That's Doc Brown from Back to the Future. Go for it. We've got a free gift for you, just for you. Go to hold that house.com and download the four-hour work month,

the Ten Commandments to Managing Property Managers. It's the key ingredient to financial independence through real estate that they are not telling you about. Did you get that? The key ingredient, the key to financial independence through real estate that they're not telling you about. And you can get that for free at Holdenstein. that house.com. Yes, the key is free. They won't tell you. They won't tell you. But we will. But we will. And we'll give it to you as well. All right. So we're going to have a good subject today, I think. I think a lot of people are going to tune into this episode because

it's a question that I think is a lot of investors' minds, a lot of landlord's minds. And that's how to raise rents. Yep. Absolutely. And so, Matt, I'm going to turn a big portion of this episode over to you just because you've done a lot more managing of the actual properties than I have because you happen to live in your neighborhood. That's right. That's right. That's right. Where you have investment properties or very close by, much closer than I do.

Absolutely. So I'll chime in if I can add anything, but most of my stuff has been by property managers that have raised my rents. But fire away, dude. What you got? What's the number one way to raise rent? Well, yeah. So, I mean, and we talked, we've talked many times about how you want to get to the

point where you're just making fine tweaks in your portfolio to make it better and better, right? So what can add more to your bottom line quicker than across the board, or at least on a regular basis, taking your rents from where they are and very justifiably taking them up a little bit higher? You know, how do you do that? And how do you do it in a way that people don't get mad and move out and it hurts you, right? So how do we do that? So this is just a few tips, things that I've used both when I was managing my own properties like you just alluded to. And you guys know I managed my own properties.

I was a terrible property manager, actually. managed my own properties for seven, eight years before I kind of came to my senses and hired people that were equipped to do that, had the right personality, had the right tools. But I learned a lot in my time when I did that so I knew what I wanted to hire. And this is how I did it when I was doing it. And this is how I kind of help and direct some of my property managers that I work with to help them raise rents too. So these aren't earth-shattering tips.

Let's just talk about it. Tip number one, obviously you've got to do your research first. You have to research market rents. you're not going to raise rents or at least not on a lot of people without causing problems if you're raising them past the point that they could go and easily get another apartment or another house for the same price, right? So know those market rents. And your property manager, a good property manager, should be able to tell you that.

He should be able to tell you, hey, we're a little bit low here on the rents or I don't think you can get this much for the rent. You know, he should be able to give you a range there. But you can do this too. And this is something that you can do as you're looking at your statements, as you're looking at the markets that you're investing in to use some simple tools just to see. And one that I like is rentometer or rentometer, you know, not a huge or robust tool. Just go to rentometer.com. And you can basically type in a little bit of information. It'll tell you if your rent is high or low

or average for the area. Have you been to that website recently? You know what? And I think I have in the last couple weeks. They've made some considerable upgrades. They have. Now they have a pro version. They limit to your number. It's not unlimited searches anymore. Right. So I went ahead and I upgraded, but... Got the pro version? Yeah. I've talked to those guys, and I forget the owner of that company, but yeah, they have a good tool there, and I think they're going to add more to it and probably bring more value to landlords and property owners. So I use that to, especially when I'm moving into a new market, and I'm not as familiar with what the rents are, and I'm kind of trying

to figure out, could I, you know, could I raise these rents, or should I buy this duplex? And if the person, if the people move out or if I move them out and they're at $500 a month, could I justifiably get 600 a month, you know, on the next round or whatever it is. So I'll go to rent a meter, type in, you know, my property information and just make sure I'm in the range. If I've got a lot of properties, and guys, I should say too, this makes a bigger difference, the more properties you have, obviously. So if I've got 10 properties, you know, in a certain part of the city, and I look that every one of them are rented for around 875, 900, and everything else being advertised and totally justifiably things are renting for $100 more than that on every single one of them,

those might be candidates then to raise that rent. But you don't know that unless you do that market research first, right? So you've got to know that. Your property manager should be bringing you that information. But as the portfolio manager, which is what you are with the properties that you own, no matter where they are, it's your responsibility to sometimes call your property manager's attention to that and say, at least ask the question, could these rents be raised? Would it affect us adversely if we did that?

So that's step one is researching the market rents. Now, step two is obviously planning ahead. All right. Nobody wants to get a knock on their door that tomorrow your rent's going up. Just wanted you guys to know, knock, knock, knock. I'm the landlord. Tomorrow your rent is going up. So this is something that obviously needs to be planned ahead,

something you need to put in place yourself or with your manager. 30, 60, 90 days ahead. I like to give a lot of notice to let people warm up to the idea. Hey, just so you know, and you can even say this. And Matt, you and I talked about this. just so you know, countywide or citywide, all the rents are raising, you know, and for your properties, if I own 10 properties in Tampa or, you know, 20 properties in Alabama or whatever it is, and you're going to raise the rents on all of them, then that's factual.

Hey, just so you know, all our rents, you know, across the board citywide are raising up to this level. And it gives them some advance notice. It lets them know that, hey, this is a market kind of thing. This is a, you know, a big industry or citywide thing, not a, you know, a, you know, I'm raising your rent. I'm doing this to you or something like that. So, hey, everyone's rent is going up by $35.

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And, you know, if your property manager ever meets with people face-to-face, that's not a bad place to, you know, kind of at least let them know or prepare them for the idea. idea that it's being raised instead of just receiving a notice on their door that their rent's going up by $50 or whatever it is. So being tactful about how you notify them about it is obviously big. And then, you know, kind of framing it the right way too. Whenever I was doing this personally, if I was talking to the tenant and I wanted to raise that rent by $35, I would say, hey, look, all the rents are raising this year by $55. And you're a long-term tenant. I really value you. and so I want you to know how much I appreciate you, and here's what I'm going to do for you. You know, all these rents are raising, and most of them are raising the $55.

We're going to raise yours $35 because you're a long-term tenant. We want to reward you. Now, what have you just done, guys? Okay. Instead of saying, hey, you know, one way you say, hey, you're being penalized, I'm going to raise this $35 and there's nothing you can do about it. The other way, the way that I just explained it, you're basically saying, look, all these people are going to have their rents raised, but I like you, and you're a good,

tenant and I'm going to reward you for being a good tenant. You're still raising their rent by $35, but you see the way you've tactfully done that. So I teach and instruct my property managers to do that. You know, don't just say, you're going to raise it 35. Say, you're going to raise it this and then give them something. You know, give them something back. And those little things and a good property manager is good at that stuff, those little things can make the difference between if someone gets mad or someone moves out or whatever it is. And, you know, thinking about two, We talk about, and this is, you know, maybe property managers speak, there are nuisance raises and there are move-out raises.

So a nuisance raise is, hey, my rent raised $25 or $35 or $45. I don't like it. As a tenant, I don't like that my rent raise, but you know what? I'm not going to move out. That's not worth moving out. I'm not going to do it. That's a nuisance raise. Now, you raise that same person, even if it's justified, and even if they're paying $150

under market rent, you try. to raise them $150 a month, well now that's gone beyond nuisance. That's a moveout raise. That's a raise that's get a lot of people raising their hand and saying, you know what, I'm moving out. That's way too much. You can't do that. Over a five or six year period, you can do it $35 a year or every other year or something like that and get to that point eventually, but you can't do that all at once. So you've got to be tactful about the way that approaches and the way they approach that. So that's another tip. And then really the last one that I would recommend is talking with your property manager. It's different in each market you're in probably,

but you want to raise rents, especially if you own an apartment building. Let's say it's, you know, 50 units or something like that. This becomes a huge income increased potential to be able to raise rents across the board. But if you're in that situation, they're going to do that, do it at a time where it's easy to refill, to refill those units that you've lost. So you own, you know, 50 units. It's one apartment complex. You're want to raise everybody by $35 or $45 or whatever it is, make sure you do it at a time where there's already turnover and a time when people are looking for it. So summer and spring are those times, you know, just across the board nationwide when people move more often, right? They're

moving more often in those summertime months. Those are times when people have some more flexibility and we just see more move-ins and move-outs, at least in certain parts of the country I'm in, we see more move-outs in those summertime months than any other times. So, So it makes sense to raise those rents and do that at a time where it's easy to fill those units if you do lose a few. And if you're talking about multiple units and you're talking about a big portfolio, whether it's single family homes or apartments or whatever it is and you own 20 or 30 or 50 units, guys, just a small bump in rent on all those covers the one or two people that might leave and that you have to replace. I mean, it covers it in a month or two, you know, to have that vacancy. And then obviously after that, it just grows and grows and grows. So, so much of fine-tuning our portfolios.

And Matt, I know you know this because you look at your statements every month and you think, what's the highest and best use of this money? Do I still have this money in the right place? Should I sell these units here and get these units over here? At that point, guys, when you reach that level where you're looking at a big portfolio and you're looking at everything you've got, the money's made $15 here, $15 there, you know, a little raise here, a little tweak there, a reduction in a fee here. You know, it's all those little fine tweaks, right? You're not going to have a home run. You know,

it's little tweaks, you know, and you do that year after year, you just keep building that portfolio and keep putting that, you know, forward into the right direction. And then it's just, that's when it gets to be fun is when you're actually just making those little tweaks and you're saying, hey, these same properties produce this much more this year. And it was because I did these little things. So raising rents is just one of those tweaks. It's something that should be happening. And especially in markets where, you know, the rentals are, you know, really sought after. I mean, you should be doing that all the time because people are always going to look at it and say, you know what, $35 more or this much raising rent. But if I left here and moved, I'd go over here and I'd pay that

same amount, it's not worth moving, you know, or maybe I'd even pay a little bit less over here. It's still not worth moving. And so just really identifying that nuisance. raise versus the move-out raise is a really big piece of it. And those are my tips. I mean, that's how I approached it. That's how I worked it when I was managing it myself. That's how I direct a lot of my managers to do it. And obviously, the better manager you have, the more they're going to bring this stuff to you proactively. So, Matt, I know your managers, you're saying you don't deal with that too much because they're raising those proactively. How do you, just a quick question, how do you speak with them about that or do they have any general practices or are you just

counting on them to research that market and know when they can do that? and they're always looking to do that. Right. I mean, they're always, my favorite question when I'm researching rents is, I'll ask the landlord, what is, if you had to rent this property in 30 days or less, what would you have to rent it at? So that kind of gives me real market rent. Sure. Because you can hold out for two or three months to trying to get that maximize rent.

But if you lose two months of rent, you just killed the whole time that you waited. You've got to run for a lot more to make that up over a year's time. Exactly, exactly. So I put a lot of faith in them there. But the one thing I want to point out that, you know, you're talking about a $35 increase, a $55 increase. And that might not be a lot or sound like a lot. But I want people not to look at it from the dollar sign because this is how I keep my portfolio

growing and growing and growing. When you talk about it, keep analyzing each piece of how hard is this money working? How hard is this money working? And so just a $50 a month. Say you have $100,000 house. We'll always keep our examples there so we can stay and grow it. $100,000 house, you've got $20,000 into it. That would count the money you have into it plus your equity.

Okay. So that's how much you have into that property. You got debt service on that. And say it rents at $1,200 a month, right? That is going to produce after debt service a 19% return, the cash on cash return 19%. Just by increasing that rent by $50 a month, going from $1,200 to $12.50, which doesn't seem like a whole lot of money. But that increases your return rate by two points.

It takes you from 19% to 21%. Those small little increases in rent really, have a significant impact on your return, how hard your money is working for you. And that's the number that I really like to focus on while I'm building my wealth, because I'm not done yet. I know, Matt, you think I'm disgustingly independently wealthy, but I'm not done yet. I think you're disgusting. I didn't know about it. No, I'm just kidding. And so I'm still building. So I have a philosophy that I want to leverage as much as I possibly can while I'm building. Sure. And I measure that growth on how fast that my wealth is building by what the return is.

That was percentage points, not the dollar amount. I look at the percentage points to see how hard my money is working. And I know those little, just a $50 a month on one property raises me on my two points on my return. So that's, I want people to look at that. So even if I took that. And that times 10 or 20 or times 30? Yeah, exactly. That's a big chunk of change.

And even if I just raised it $25, which would seem so insignificant, it still went from a 19% interest rate to a 20% interest rate, including the bank terms. Right. And you know, you look at people where they, when they're getting their financing done and they're negotiating over a 4.3% bank loan and a 4.5% bank loan, I mean, you're going, oh, this guy's ripping me off. He's charging me 4.5. I get 4.3 across the street. Right. And raise your rent, $25.00. And you just drop it. it down to 3.3%. Right. You know what I mean? Like you dropped it a whole point by being able to do it this way. Yep. So don't trip over the nickels. That's right. To pick, or don't pick over, don't trip over the dollars to pick up the nickels. Exactly. Right. So just use your leverage.

Get those, get the best rate you can, but don't let that be the deal breaker. You can make it up with a $25 increase in rent. That's it. That's it, guys. And you're always looking for ways to finally tune that portfolio. You're always looking for ways to increase those percentages, like you said. and that takes working with the right managers in the right places and watching over what they're doing. And, you know, good ones will sometimes do that stuff on their own, but sometimes even good ones need a little suggestion, you know, and say, hey, you know, have you looked at, you know, these 10 or 20 that you're managing over here? Could we do a, you know, a round of raises there and get me to that percentage that I'm thinking about, you know? And then obviously a good manager is going to help you figure that out, help you do that market research, help you figure out the tactful way to do. it. But these have just been some good practices for me. And especially when I was first starting

in rental properties early on and just had, you know, one or two or three or four and was really living kind of hand to mouth because I was trying to put away properties, but I really didn't have, you know, a ton of breathing room there. Man, that extra $25 times four, that was $100. I mean, you know, that was money. Right. You know, and, you know, money is money, right? Whether it's $10 or $100 or $1 million, every little bit counts. And I've always found that the money is lost and many times made on those little tweaks that have, you know, kind of an overall effect on your portfolio. And that's what I've always focused on. So should you raise rents? Yes, absolutely. Should you do it at the detriment of, you know, losing good tenants at a bad rate? No, you've got to do it

the right way, but you should definitely be looking to maximize the value of your property and the highest and best use of that property, your time and your money all the time. Right. You know, I'll just, I'll close it out with this. It goes both ways, too. You can look at your expenses on the property is the exact same way. From someone who owns, you know, over 100 units and multifamily. You know, if I can chop down that, the grass guy, the lawn care down 100 bucks, I just drop the, there's a $100 raise I don't have to do now in my rents. Changing insurance companies.

Changing insurance companies. Cross the board, you know? Absolutely. And knowing that you're getting a similar coverage, but it's costing you $100 less a year on each property or something, times 10 properties, times 20 properties. times 30 properties, guys, you know, that adds up so fast. You know, it really does add up. And you don't know it until you kind of look at all the numbers when everything shakes out at the end of the year and you look at your taxes. But you can attribute, you know, a big piece

of the increases if you're managing your portfolio correctly to those little changes. So got to do it. Then you bring in the valuation of your property per the cap rate by doing those little adjustments. Oh, yeah. And that's tens of thousands of dollars a year. Fun to pop into the performer. Yeah. There's two more episodes right there. So let's wrap that up. That's it for today. Flipping houses can make you rich.

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