Raising Rents - How, When, and Why?
As we all know, in order for an apartment community to consistently maximize its net operating income, rent increases are a necessity.
They help offset increases in operating costs, thereby keeping profits healthy; and they increase the community's value.
Any community that is not periodically evaluating their rental schedules (even during difficult times) and making increases as the market will bear, is simply not managing for maximum NOI (Net Operating Income) or ROI (Return on Investment).
Is It Time? There are lots of excuses for not raising rents.
If a community is already making a nice profit and resident retention is high, it is easy to adopt the "if it ain't broke, don't fix it" approach.
Alternatively, if a community is already struggling with less-than-stellar occupancy levels and retention is uncomfortably patchy, or offering concessions, they may feel that an increase would be the death knell for the community.
Certainly, there are some markets and some communities that simply can't afford an increase; but there are many, many cases where communities are simply crying out for one.
In my experience, many communities believe that to implement a rent increase, they need to do it across the board; or they believe that if they're offering concessions, they can't increase rent at the same time.
These commonly held beliefs are simply not true! How can you tell if your community is due, or past due, for a rent increase? Here are a few strong indicators: o A waiting list for the community in general or for particular floor plans o Low resident turnover rates o Vacancy rates of 5 percent or lower o Consistently higher rates or lower concessions among your competitors o No vacancy in specific floorplans If some of these conditions exist for your community, it's probably time to stop making excuses and start planning an increase.
Before You Get Started...
Of course, raising rental rates is not as easy as it sounds.
In fact, it can be terrifying.
This is especially true in a renter's market, where even a small bump can send both current and potential residents sailing out the door and down the street to a better deal; so tread with caution! The following two strategies are good ways to ease in, without taking scary chances with your occupancy level: Vary increases by apartment type and demand.
Rather than making an across-the-board increase for all your apartments, assess the popularity of your various floor plans and locations and tailor your rates to reflect demand.
This will help you strike that all-important balance between maximum income and maximum occupancy.
"Try out" the increase on new leases first.
Before you spring an increase on renewing residents, test the new rental amount on vacant apartments to see how the market responds.
If new residents, most of whom have been out there shopping, find the rate acceptable it's a good bet that you are in line with the market.
Knowing this can give your leasing professionals both the confidence they need to sell the increase to existing residents and an excellent tool for overcoming price-based renewal objections.
Softening the Blow Once you've tested the new rates and become convinced that it's time to move forward, you are faced with the task of selling the increase to existing residents.
Obviously, you need an approach that will result in the least possible resident turnover.
The strategies below can help.
Give them time to adjust.
There are differing opinions on how much notice you should give residents of a rent increase.
Some believe in providing the shortest possible notice-only what is required by law-reasoning that too much advance notice only gives residents time to find a new home.
Others think you should give a longer notice, to give residents a chance to prepare for the new amount and for the community to have a quicker understanding on the marketing efforts it will take to release the turnover that was created.
When deciding how much notice to give, you may want to consider the size of the increase.
While most residents will be able to absorb an extra $10 or $20 per month, larger increases may be more problematic.
A longer notice, then, would give them more time to rethink their monthly budgets and adjust to the higher rate.
It also gives you more time to overcome their objections and convince them to stay.
Use odd numbers.
I don't mean weird! I mean odd as opposed to even.
Ever notice how so many retail items are priced just one penny below the full dollar amount...
$5.
99, $29.
99, $99.
99, etc.
? There's a reason for that; marketing theory holds that consumers perceive these prices to be more fair and honest-that is, they tend to feel that the items are marked at the lowest possible price.
You can put that same pricing psychology to work for you.
Instead of a $15 dollar increase, try $14 or $16.
Residents will be more likely to perceive the increase as calculated to meet a specific need rather than simply a way to beef up profits.
First improve, then increase.
From a fiscal perspective, it may make more sense to raise rents first, and then use the additional income to make any community improvements that are needed.
But from a resident satisfaction standpoint, this is the wrong order.
Remember-residents don't see your operating budget.
They don't know what capital improvements you have planned for the coming year.
What they know is that the carpet in the common areas is threadbare, the building exteriors are faded and chipped, and the parking lot needs resurfacing.
When you hit them with a rent increase, they're not going to think "Oh, great! Now they can fix the place up!" They're going to think, "$20 more? For what!?" If at all possible, make any truly necessary improvements before you ask for more rent.
Then you can point to those improvements as justification for the increase.
Don't drag it out.
Some managers advocate a slow, incremental approach to rent hikes, believing that a series of small increases spaced over a few months will be easier to swallow than one larger one.
Actually, however, it is almost certainly better to get it over with in one fell swoop.
Pestering residents every few months for a higher rent is only going to keep them continually annoyed.
An exception to this might be made in cases of large increases-for example, when a resident has been paying an extremely low move-in incentive rate, and you are attempting to bring him or her within striking distance of market rate.
In these cases, you may want to take a more graduated approach.
Even then, however, it's probably best to let the resident know the full amount of the increase up front, and explain that you are spacing it out only to make the transition easier on him or her.
Give them an upgrade.
It's not news to anyone in this industry that residents don't like the idea of paying more money for the same old apartment.
They hear "increase"; they look around at their carpeting (at least a year old, maybe more) and their paint (not as fresh as it used to be); and they start asking the inevitable question: "Why should I pay more for an apartment that's a year older?" So give them a reason.
Roll one or more apartment upgrades into their renewal offer, and everybody wins.
The resident feels like he's getting something new for his higher rate, and the community becomes more valuable through the improvement.
Give them a chance to opt out of the upgrade.
This tactic is feasible only if you are planning to offer a fairly substantial-and pricey-upgrade.
If you are offering a major upgrade, like new carpet or appliances, you may be able to use it as a sort of reverse negotiating tool.
For example, if a resident was extremely resistant to the amount of the increase, you might agree to a lower increase if he or she would waive the upgrade.
Before doing this, be sure to do your homework and make sure you are accomplishing what you need to accomplish in terms of income.
Remember, too, that an upgrade increases the value of the community.
Therefore, even if the dollar amounts come out even between the money you lose by accepting a lower rent rate and the money you save by not upgrading, you are not truly breaking even.
Along with the Rent Increase...
If your occupancy is high and your market is strong, you may want to consider also raising your rental criteria.
Remember, you will have already done so to an extent by increasing your rent and thereby requiring residents to have a slightly higher income level to meet your income standards.
And adjusting your qualifications upward just a bit more can refine your overall resident profile.
Some ways you can improve your resident profile include: o Requiring a "good" credit history for a longer period of time o Requiring a higher overall credit rating by allowing fewer low-rated items o Reducing or eliminating any incentives or concessions you offer You owe it to your community's success to manage your community's rent - not merely to collect it.
Consistently evaluate your rental rates, increase them as the market will bear, and manage for maximum NOI and ROI.
They help offset increases in operating costs, thereby keeping profits healthy; and they increase the community's value.
Any community that is not periodically evaluating their rental schedules (even during difficult times) and making increases as the market will bear, is simply not managing for maximum NOI (Net Operating Income) or ROI (Return on Investment).
Is It Time? There are lots of excuses for not raising rents.
If a community is already making a nice profit and resident retention is high, it is easy to adopt the "if it ain't broke, don't fix it" approach.
Alternatively, if a community is already struggling with less-than-stellar occupancy levels and retention is uncomfortably patchy, or offering concessions, they may feel that an increase would be the death knell for the community.
Certainly, there are some markets and some communities that simply can't afford an increase; but there are many, many cases where communities are simply crying out for one.
In my experience, many communities believe that to implement a rent increase, they need to do it across the board; or they believe that if they're offering concessions, they can't increase rent at the same time.
These commonly held beliefs are simply not true! How can you tell if your community is due, or past due, for a rent increase? Here are a few strong indicators: o A waiting list for the community in general or for particular floor plans o Low resident turnover rates o Vacancy rates of 5 percent or lower o Consistently higher rates or lower concessions among your competitors o No vacancy in specific floorplans If some of these conditions exist for your community, it's probably time to stop making excuses and start planning an increase.
Before You Get Started...
Of course, raising rental rates is not as easy as it sounds.
In fact, it can be terrifying.
This is especially true in a renter's market, where even a small bump can send both current and potential residents sailing out the door and down the street to a better deal; so tread with caution! The following two strategies are good ways to ease in, without taking scary chances with your occupancy level: Vary increases by apartment type and demand.
Rather than making an across-the-board increase for all your apartments, assess the popularity of your various floor plans and locations and tailor your rates to reflect demand.
This will help you strike that all-important balance between maximum income and maximum occupancy.
"Try out" the increase on new leases first.
Before you spring an increase on renewing residents, test the new rental amount on vacant apartments to see how the market responds.
If new residents, most of whom have been out there shopping, find the rate acceptable it's a good bet that you are in line with the market.
Knowing this can give your leasing professionals both the confidence they need to sell the increase to existing residents and an excellent tool for overcoming price-based renewal objections.
Softening the Blow Once you've tested the new rates and become convinced that it's time to move forward, you are faced with the task of selling the increase to existing residents.
Obviously, you need an approach that will result in the least possible resident turnover.
The strategies below can help.
Give them time to adjust.
There are differing opinions on how much notice you should give residents of a rent increase.
Some believe in providing the shortest possible notice-only what is required by law-reasoning that too much advance notice only gives residents time to find a new home.
Others think you should give a longer notice, to give residents a chance to prepare for the new amount and for the community to have a quicker understanding on the marketing efforts it will take to release the turnover that was created.
When deciding how much notice to give, you may want to consider the size of the increase.
While most residents will be able to absorb an extra $10 or $20 per month, larger increases may be more problematic.
A longer notice, then, would give them more time to rethink their monthly budgets and adjust to the higher rate.
It also gives you more time to overcome their objections and convince them to stay.
Use odd numbers.
I don't mean weird! I mean odd as opposed to even.
Ever notice how so many retail items are priced just one penny below the full dollar amount...
$5.
99, $29.
99, $99.
99, etc.
? There's a reason for that; marketing theory holds that consumers perceive these prices to be more fair and honest-that is, they tend to feel that the items are marked at the lowest possible price.
You can put that same pricing psychology to work for you.
Instead of a $15 dollar increase, try $14 or $16.
Residents will be more likely to perceive the increase as calculated to meet a specific need rather than simply a way to beef up profits.
First improve, then increase.
From a fiscal perspective, it may make more sense to raise rents first, and then use the additional income to make any community improvements that are needed.
But from a resident satisfaction standpoint, this is the wrong order.
Remember-residents don't see your operating budget.
They don't know what capital improvements you have planned for the coming year.
What they know is that the carpet in the common areas is threadbare, the building exteriors are faded and chipped, and the parking lot needs resurfacing.
When you hit them with a rent increase, they're not going to think "Oh, great! Now they can fix the place up!" They're going to think, "$20 more? For what!?" If at all possible, make any truly necessary improvements before you ask for more rent.
Then you can point to those improvements as justification for the increase.
Don't drag it out.
Some managers advocate a slow, incremental approach to rent hikes, believing that a series of small increases spaced over a few months will be easier to swallow than one larger one.
Actually, however, it is almost certainly better to get it over with in one fell swoop.
Pestering residents every few months for a higher rent is only going to keep them continually annoyed.
An exception to this might be made in cases of large increases-for example, when a resident has been paying an extremely low move-in incentive rate, and you are attempting to bring him or her within striking distance of market rate.
In these cases, you may want to take a more graduated approach.
Even then, however, it's probably best to let the resident know the full amount of the increase up front, and explain that you are spacing it out only to make the transition easier on him or her.
Give them an upgrade.
It's not news to anyone in this industry that residents don't like the idea of paying more money for the same old apartment.
They hear "increase"; they look around at their carpeting (at least a year old, maybe more) and their paint (not as fresh as it used to be); and they start asking the inevitable question: "Why should I pay more for an apartment that's a year older?" So give them a reason.
Roll one or more apartment upgrades into their renewal offer, and everybody wins.
The resident feels like he's getting something new for his higher rate, and the community becomes more valuable through the improvement.
Give them a chance to opt out of the upgrade.
This tactic is feasible only if you are planning to offer a fairly substantial-and pricey-upgrade.
If you are offering a major upgrade, like new carpet or appliances, you may be able to use it as a sort of reverse negotiating tool.
For example, if a resident was extremely resistant to the amount of the increase, you might agree to a lower increase if he or she would waive the upgrade.
Before doing this, be sure to do your homework and make sure you are accomplishing what you need to accomplish in terms of income.
Remember, too, that an upgrade increases the value of the community.
Therefore, even if the dollar amounts come out even between the money you lose by accepting a lower rent rate and the money you save by not upgrading, you are not truly breaking even.
Along with the Rent Increase...
If your occupancy is high and your market is strong, you may want to consider also raising your rental criteria.
Remember, you will have already done so to an extent by increasing your rent and thereby requiring residents to have a slightly higher income level to meet your income standards.
And adjusting your qualifications upward just a bit more can refine your overall resident profile.
Some ways you can improve your resident profile include: o Requiring a "good" credit history for a longer period of time o Requiring a higher overall credit rating by allowing fewer low-rated items o Reducing or eliminating any incentives or concessions you offer You owe it to your community's success to manage your community's rent - not merely to collect it.
Consistently evaluate your rental rates, increase them as the market will bear, and manage for maximum NOI and ROI.
