Raise Rent with Caution: A Guide for Which Apartment Classes Are Safe Bets
If you've wondered when you should raise rent at your property/properties, or by how much, we looked into the state of tenant wages and rental rate opportunity across property classes. Using the info we first found in an article by the Indiana Real Estate Journal we offer insight into which property class is the best (and worst) bet for safely raising rent without risking tenant loss.
According to the IREJ, recently renters have tightened their belts and spent less on wants vs. needs – in an effort to balance budgets thrown off by rent hikes. Landlords raising the rent too high on any of these renters risk losing them altogether; initially they may miss payments or move into cheaper accommodations, or move in with friends or relatives. Normally a market with low vacancy is a safe market in which to raise rent; however, proceed with caution. Identifying the right time, properties, and tenants will make this a safer venture.
The IREJ quotes stats from a recent Freddie Mac study saying that 44% of renters are looking to move based on rent increases. The year before it was 34% who said they'd move due to rent increases. Class-A property managers should look at local property listings; according to the article it's these tenants who are the most mobile and who have the most to spend on moving. Renters at Class-A+ professionally-managed apartments earn around $80,000/year and spend only 20% of that on rent. Looking at local property listings should show how big a threat tenants moving out really is.
Class-B property managers are in a better spot. The IREJ says that owners of luxury apartments which aren't necessarily new anymore are in a better position to raise rent. Tenants at professionally-managed Class-B apartments earn more than $50,000 a year but spend less than 24% of that on rent. It's usually safe to raise rent on these properties. Another bonus? This apartment class is usually priced well below newer product; you can raise rent significantly while simultaneously offering less expensive units than new ones in the market (even when the new apartments have incentives or free rent, etc). The expert IREJ cited claims that Class-B properties should drive overall apartment growth for the next few years, with potential for further rent growth.
Class-C and D properties are limited in potential for growth. Their tenants live with more financial uncertainty; on average they make less than $30,000/year with 30% of that going to rent. What's more, these tenants probably have not seen a raise in their income since they moved in, making it hard to raise rental rates. Property managers work to keep tenants because these properties sit longer than other property classes if vacant. Turnover costs are also high, making retention important. Since these properties need to keep vacancy low, property managers should carefully weigh any rent increases. These apartments usually cannot sustain any “meaningful” rental growth.
Although vacancy is low throughout the rental property classes, property managers should take into account whether their property and tenants support rental increases. Our take-away: Class-B properties have both the lower acquisition price and tenant-wage base to support rent increases without risking turnover.