Why rents must go up
Price increases are staggering right now. I know everyone is feeling it at the gas pumps and at the grocery stores.
But what about us landlords? I can say from personal experience that we are feeling it in lots of places. Let me explain.
This last week I was on a call with Matt from Simple CFO. Simple CFO is a company that offers fractional CFO services. This works well for smaller companies that don’t have the budget to hire a chief financial officer but still need help with finance planning in their business. Matt and I meet once a week to go over any necessary financial issues from the previous week, go over our numbers and to do any financial planning.
This week, we were reviewing the numbers on the operations costs for running our rental company and then checking to make sure the target we have set for our expense factor was correct. The expense factor in a rental business is money set aside out of each rent payment to take care of and plan for property taxes, insurance, vacancy and repairs.
Matt took a look at the last six months of repairs and felt like we were over allocating for the expense factor. He said our maintenance costs have been pretty low. I told him we haven’t had a tremendous amount of service calls yet this year but that the expense factor is not something that you can gauge from just your past expenses. You also have to think into the future to plan for roofs and air conditioners. He agreed, and we kept the same target. The very next day, we received four, count’em four, air conditioner calls and two plumbing calls.
At the end of the day, I had to text Matt to tell him how badly he’d jinxed us. But seriously, once those invoices came in from the repairs, I was shocked at how much everything had gone up. And it was not the 15 % increase I’ve seen people posting. We were looking at much higher numbers. Let me give you some real examples.
We had to get a new roof put on recently. Last year. we did a similar size roof, and it cost $6,000. The roof this year was $9,800. That is a 61% increase! As far as air conditioners, last year, we had a complete system install, and it cost $5,500. We just got a bid for a similar sized install, and the price was $8,500. That is a 54% increase from the previous year. Those are pretty big increases in those two areas. And because of that, our rehab and repair costs have doubled and nearly tripled in some areas.
But repairs are not the only place we’re feeling the increases. Every insurance policy we have has gone up. And the county reevaluated the property values on every single property we have. I am still waiting for the last couple to come in to see how bad our tax bill is going to be. But it will be a substantial increase as well.
I say all this to show what property owners are dealing with. You see, landlords
sometimes get a bad wrap when it comes time to increase rents. You will hear people say things like, “I have a greedy landlord.” Or, “They got money. They can afford it.” But in reality, a lot of the mom-and-pop landlords are scrimping by and watching their costs skyrocket. And all the things mentioned above mean our cashflow just went down tremendously on our properties. That is, unless we do something about it.
After reviewing our new projected costs, we decided to review our rent numbers since we have many tenants about to renew their leases. As it turns out, our tenants are averaging about $350 below market rent rates.
Now, I’ve been a proponent of not raising rents because I believed that keeping the rents below market keeps tenants in place for a long time and that this stability outweighed the cost of turnover. But with the amount of increase we’re experiencing in costs, we have no choice but to increase our rents.
Next week, I’ll tell you about how we went about talking to our tenants about the rent increase and what kind of results we had.