One of my favorite income streams is rental property, especially when conditions are favorable for raising rent. I've bought several rental properties over the past decade and plan to continue buying more.
A particularly popular rental I have is a two bedroom, two bathroom condo with parking and a view of a nice park. It's not fancy, but the location is fantastic. In addition, it has everything one needs to live a good life in one of the best areas of San Francisco.
My first tenants lived there for 5 years and actually got married after their second year. Incidentally, my second tenants also married after two years of living there and extended for a third year.
Perhaps the apartment is blessed with love and good feng shui. Whatever the case may be, I'm putting the two marriages in my marketing material if I ever sell!
Raising Rent Is Just Business
What I do know for sure is that owning rental property is like running a business. The goal is to maximize revenue by raising rent when market conditions support it, find optimal tenants, reduce turnover, and control expenses.
Landlords aren't evil! Nor are they always rich as some tenants might believe. Instead, most landlords are just trying to build their own retirement portfolios with the best product offering possible. Raising rent is nothing personal. It's just business between two willing parties.
Related: Is Owning Rental Property Worth The Headache And Hassle?
Rental Price Then Vs Now – Everything Turns To Gravy
When I first rented out one of my rental properties 8 years ago, I was charging $2,150 a month. Two years later, I raised the rent to $2,600/month. The tenants stayed on and paid for three more years until they had a baby and decided to rent something larger.
When the next tenants moved in, I had the opportunity to raise the rent again to $2,999. The $3,000 rental level is a relatively big hurdle in San Francisco for a young couple to pay.
So I was wondering after a couple of years at $2,999 how I could tactfully go about raising rent again without scaring them away. After all, the economy rebounded nicely and rents around the city moved higher.
Rent increases will likely last for a while given housing affordability is lower with a strong increase in property prices.
Get As Close To Market Rents As Possible
The goal of every landlord is to get as close to market rents as possible while having as little turnover as possible. As I said earlier, this couple had gotten married during their second year living in my place, and I figured they had no intention of moving.
After all, the apartment can easily accommodate a baby or two for several years as well. I successfully was able to raise their rent to $3,400 a month and they've been great tenants.
In addition, I've also been a good landlord. I respond to all their e-mail inquiries promptly. And I help fix whatever problem they might have within a couple of days.
Related: Should I Pay Off My Rental Property Mortgage Early?
8 Steps To Raise Rent And Extend A Lease
1) Figure out whether or not the tenants are happy where they are.
The happier they are, the more likely they will be willing to pay a higher rent to stay. Moving is stressful, costly, and a complete pain. What is their happiness worth?
If they've been paying on time and have had relatively little complaints, chances are they are pretty happy.
2) Go online and figure out how much a comparable property is renting for.
You need to be in-line with the market. Once your tenants have lived in your place for a while (1-2 years), they will have grown attached. Also, if you haven't raised your rent for 1 or 2 years, you are probably under market rents by at least 1-2% a year.
You should make your tenants feel like they are still getting a deal. If you raise the rent to the middle of the average comparable, you'll achieve this goal.
3) Know the maximum you are allowed to legally raise the rent.
If you have a condo (not rent controlled), you can technically raise the rent by up to 10% in San Francisco with a 30-day notice.
With a 60-day notice, you can raise your rent by up to 60% up to market value if needed. Make sure you give your tenants ample warning.
4) Assess the financial impact of what will happen if your tenants move.
Your place might sit empty for a month while you try and find equally comparable tenants.
Ask yourself whether you will be willing to go back and not raise the rent to encourage them to stay, and whether you are willing to spend the time finding someone new.
5) Understand the tenants employment situation and their industry cycle.
If one tenant works at Facebook, and the other is an investment banker, you can be pretty confident they've done extremely well over the past couple of years.
Understand your tenant's occupations and you will have terrific insight into what you can charge.
6) Make it easy for your tenants to pay you.
Prepare a lease extension agreement for one year with the desired new rent and lease terms filled in. Make it as easy as possible for your tenants to sign and return back to you.
That includes e-mailing them a copy and having them mail it in with their next rent check, or faxing back the document with their signature. The easier you allow your tenants to sign a transaction, the more likely they will.
7) Offer your tenants proof that they are getting a good deal.
If your tenants are expressing some doubts, show them comparable apartments that are much more expensive to make them realize what a reasonable deal they have.
Make them feel special by reminding them of your promptness in communication. Now is the time to utilize your goodwill.
8) Set the tenants minds at ease on raising rents in the future.
Mention that you will probably not raise the rent next year, to give them comfort in the fact that they are paying more rent this year.
In the contract, you can highlight that by signing an extension, they are protected from having to move out in 30 days notice if you the owner decide to sell the place.
Whether you end up raising the rent again in a year is a different matter. But for now, you have no intention to.
Related: What Is It Like To Be A Landlord And Own Rental Property?
Cash Flow Is King
Eight years ago, the annual rent for this particular property was $25,800 a year at $2,150 a month. With the 10-year risk-free rate at roughly 4.5%, the property was worth about $573,000 ($25,800 / 0.045), ignoring any risk premium required for maintaining the property.
In other words, if one didn't have any mortgage or expenses, the property is equivalent to $573,000 in the bank earning $25,800 risk free.
Related – Rental Properties: The Investment Case To Buy More Today
Nothing is risk free of course, and there will always be expenses such as property tax and insurance, but stay with me as I show you how things work.
How Does An Extra $1.2m Sound?
At $3,100 a month, the annual income is $37,200. If the 10-year risk-free rate was still at 4.5%, the property would be worth $826,666 ($37,200 / 0.045). Pretty nice to increase your assets grow in value thanks to rent increases over the years right?
In April 2015, thanks to massive quantitative easing (printing money) by the Federal Reserve, and a sluggish economy, the 10-year yield plummeted to 1.8% vs. 4.5% ten years ago. The system was awash with liquidity.
If I take $37,200 in annual rental income and divide by 2.1%, the property's value jumped to $1,771,428! In other words, it takes $1,771,428 cash in the bank at a 2.1% risk free rate to earn $37,200 a year in income.
Raising Rent As A Landlord Pays Off
Take a bit of time to really soak this information in. If you're a landlord generating $37,200 in annual income, your property could have appreciated by $1,198,428 without doing anything except keep happy tenants! Of course nothing is really risk free, even the 10-year US Treasury bonds you are buying.
If inflation starts coming back, your rental property by definition inflates since it is a real asset. In an inflationary environment, you can raise the rent more. You'd be valuing your property not as a risk free income return, but as a rapidly appreciating asset which you should consider selling at some point.
Your property is only worth what someone is willing to pay for it. And if you are a rental property buyer you should command at least a 1% premium over risk free, which would value the $37,200 annual income property at $1,200,000 ($37,200 / 0.031) at most.
However, if you understand the analysis above, you will realize that rental properties have sky rocketed in value thanks to the economy ironically, and the Federal Reserve.
Related: The Biggest Mistake Landlords And Property Managers Make
Delicate Does It When It Comes To Raising Rents
I actually don't enjoy raising the rent on my tenants. I feel guilty, especially as the monthly mortgage has gone down about 23% since the refinance a year ago and 32% since first purchase.
However, inflation affects us all, and that means the variable costs such as maintenance, building materials, and labor go up which needs to be covered by rent increases.
But, if you're finding that the market has moved higher, by all means consider raising rent on your existing tenant. It's your property, which should be treated as a business.
Lease Extensions And Raising Rent
My tenants signed a one year extension at a new rental agreement price of $3,100. That's a 3.3% increase, which in the grand scheme of things is not much given how far the economy has come from just two years ago.
I should raise the rent to $3,300-$3,400, but I just feel too guilty as they are great tenants. Despite the small increase, when you consistently increase the rent and lower your mortgage payments, the spread get huge over time.
My ultimate goal is to continue raising rent in minor 3-4% annual increments and have a cash flow generating machine with no debt.
Being a landlord is not that difficult if you have a good property which attracts good tenants. The most important thing is to spend a thorough amount of time screening your prospective tenants before allowing them to sign the lease.
The last thing you want is a nightmare tenant damaging your property, and missing payments that you can't get rid of. It's a headache booting out unlawful tenants.
A rule I hold steadfast on is that a tenant must earn at least 45X the monthly rent as annual income. That's $135,000+ in this case. Bank assets should also show at least 10X monthly rent in liquid net worth.
Maximize Rental Income And Extend Your Lease
So there you have it. Hopefully the tips above will help you maximize your rental income and extend your lease!
Know that as interest rates have declined, your rental property has rocketed in value as well! If all that's not enough, at the very least you've paid off years worth of principal.
Seriously consider rental property as part of your retirement portfolio, because at the end of your mortgage, you will own a real asset free and clear. And what's better than living rent free where nobody can ever kick you out and tell you what to do? Priceless.
Also check out: Example Of A Great Rental Lease Agreement
Wealth Building Recommendations
Shop around for a mortgage
Check the latest mortgage rates online. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance.
For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Explore real estate crowdsourcing opportunities
If you don't have the downpayment to buy a property, don't sweat. You can still gain exposure to real estate through real estate crowdfunding (REC). Other benefits are with REC you don't have to deal with the hassle of managing real estate. Nor do you have to tie up your liquidity in physical real estate.
To learn more, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. REC allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible.
For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you're looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It's free to look. I've personally invested over $800,000 in private real estate to take advantage of rising rents and property prices in the heartland.
Please Keep In Touch
If you enjoyed this article, please sign up for the Financial Samurai Newsletter here to receive exclusive content. Also be sure to check out my list of top financial products for great tips on growing wealth.
Hi Sam – I am impressed with the 2.375% 5/1 ARM you negotiated for your last refinance. I am wondering how you are able to get this as a landlord? Or do you live in your rentals for a period of time to refinance at the homeowners rate? I live in NC but have a rental in Wayland, MA with an adjustable 30 year mortgage at 3.375%. I am considering whether to refinance, but the landlord rates would bring it to 4.475%. Interested in understanding how to qualify for homeowners products.
Thank you!
I know that this is an old article, but I just read it and had a question. You state that a tenant should earn at least 45x rent. In my area rent is 1100-1400 on a 3BR ranch with approx 1150 sq ft. That comes out to 49,500 to 64,000 in salary. This is in line with what I suspect the incomes of people in the neighborhood I own property in. Then you went on to say that they should also have a net worth of 10x the rent. That is 11k-14k in net worth. I can bet that most of the people in that zipcode probably live paycheck to paycheck(except the stealthy wealthy ones) and have a negative net worth. How critical is this particular piece? Do you have another article that talks about your criteria for screening renters? I have my own process, but I would be interested in hearing yours. Link if it’s already written.
Thanks,
B
Thank you for the great article. We have 8 doors currently and can’t get the next one rehabbed and rented soon enough. Don’t care too much about value at this point, at least not as much as cash flow. Seems those who speculated on value got hurt the worst in 2009. Long term cash flow investors thrived even more during this same period. Like going to the clearance rack!
Considering moving into a van down by the river. Sell all my possessions to buy more boxes!
There is no investment that comes close to Cash flowing rental property.
You all are disgusting, greedy PIGS! I can’t believe that you think that money is more important than displacing people who have been in their homes for 40 years. You should be ashamed of yourselves. I can’t wait until this bubble bursts on all of you. I hope the big one hits very soon.
Wishing harm onto others is not nice.
You keep raising rents, salaries stay flat. People “keep paying” because they have no choice.
Rent goes from 30 to 40 to 50 to 60 to 70% of their income and they can never save enough to buy because people like you keep valuations inflated through bidding wars on what, to you, is just another piece in the empire.
And then you laugh about getting rich off of others for doing jack shit except sitting back and collecting money from your “cash cows”
Dont be surprised that you and those like you inspire resentment and scorn.
You’re absolutely right, which is why I drive a Honda Fit to keep a low profile while my tenants drive a Range Rover and BMW X5. I strongly believe in working hard, taking risks, and working harder to make sure your investments provide income for retirement. I’m a strong believer in Stealth Wealth too.
I only raise my rents to market AFTER my tenants move out. The most I’ll ever raise my rents in a year is about 3-4%, but mostly only 1-2% to keep up with the ever rising cost of property taxes, maintenance costs, and insurance. Rents are rising more like 8% to sometimes 15% here in SF a year.
I strongly encourage everyone to get NEUTRAL property by owning the own place. Ever increasing inflation is a real killer.
How do you handle situations of ‘revolving’ tenants, where multiple people rent a place together and one (or more) moves out but not the other(s)? That’s very common in urban areas. Do you raise to market rate upon any change in tenancy, or wait until the place is totally vacant?
Hi Sam – First, I’m really impressed with your blog and the vision behind it. So, if no one has taken the time to thank you for publishing your advice, opinions and insights, I’ll do it — THANK YOU!!!
Second, I have a question regarding “pass-through” rent increases that I’m hoping you can answer. I own a 2BR/1BTH TIC unit in Telegraph Hill that I currently rent to a couple who have lived in the unit since I bought it last year. I just gave them notice of the annual rent increase allowed by SF Rent Board, but I just read that certain additional increases are also allowed to be “passed through” to the tenant in rent-controlled units. Specifically, Operating and Maintenance costs, as well as capital improvements. Do you know if an increase in property taxes and HOA dues is included in the definition of “Operating and Maintenance” costs?
Howdy Daisy, thank you for your thank you!
I’m unfamiliar with rent-control rules b/c I own a condo and a SFH, which are not under rent control. But, given you already gave them notice, it sounds like you will have to wait another year to give them the new pass-through notice, no? It all depends on how much you like your tenants! The pass-through makes sense, but is probably a 50/50 split on the increase.
YOU SHOULD ALL BE ASHAMED OF YOURSELVES!!!!! Conniving to use your power over your tenants to manipulate them into a situation that forces them to choose between the stress and hassle of uprooting their lives, and coughing up some amount you designate oh so carefully and gently deliver to line your own pockets. I know you own it and you deserve to make a profit. BUT COME ON….The mortgage DECREASED by 23% but you still jack up the rent? You expect us to think that maintenance costs jumped up THAT MUCH that a 23% decrease in your mortgage doesn’t offset it???? That’s just a lie you tell yourself to ease your conscience. And the despicable lies you tell them to make them feel like their getting a deal and that you “probably” won’t increase it next time when you’re publishing articles on how to beguile them so you can do just that??? Wow.
It’s your property and it’s a business, granted, but you are absolutely heartless for sticking it to those who make their home in your “business”. Renters already have NO RIGHTS in this city so thanks a lot for publishing the tools for those in power to continue to stick it to us. I honestly don’t know how you sleep at night…oh wait….on the Egyptian cotton sheets the brand new parents who are probably doing their best to save for their kids college funds are buying you. Sweet Dreams Samurai.
Thanks for your comment! You’ve inspired me to write a 2,000 word rebuttal AND help you and other tenants with tips on how to keep the rent flat or even lower the rent. Fight on!
https://www.financialsamurai.com/do-landlords-have-the-right-to-maximize-rental-profits/
Financial Samurai,
Do you phone all your tenants to inform them of rent increases? Or do you only mail notices. And what happens if they play the “I didn’t get the notice” game.
This is an old post so don’t know if you’ll reply. Didn’t want to “spam” a current unrelated post.
Much great advice for The City. What about commercial rents? We’ve saved up enough to probably buy a small commerical condo, but see a great space for rent on the ground floor in the city. Should we wait for a nice mixed unit property/ condo to buy or rent with 5% rent increases after the first 2 years fixed?
My husband and I have a chance to buy the condo we are renting from our landlord. He wants to sell, or short sell it. We were in the process of saving for a house in an up and coming suburb, in the next year or so.
Will buying a condo first de-rail our plans for a home in the next few years?
Is it worth buying if the mortgage is a few hundred more our present rent?
Is there a difference in short sale v regular sale?
Without knowing your financials and the price of the condo, I cannot advise well.
If you plan to trade up in a few years, then I would not buy unless you want to be a landlord. Selling costs are 5-6%.
My husband makes 100k net, and Im currently unemployed. we have 35k savings and we were saving while I was looking for work. we currently pay 1500 a month for a 1bed/1bath in rockridge. We currently have no cc debt or car loans. The landlord wants to sell his place, 1beds/1baths in our building go for 220k-230k with 330 hoa monthly in a large complex. Will buying this place de-rail us from buying a 400k home in the next 2 years? (if I get a job) I ordinarily make 50k. or is it better to not invest in this condo.
If you plan to move again and buy another property in two years, then rent until then.
Transaction costs are 5-7%z
hi, thanks for the helpful information posted.
I am a happy landlord for 30 properties collecting good rental with 100 % occupancy. You are right, property prices has rocketed and so is rental demand.
My question is, if you do have some properties that have doubled up in the price, would you cash out (sell off) or continue to receive monthly rental with a yield of 12%
Appreciate your comments…
Rgds
Veron
Vernon, you’re the one with 30 properties! I am but small time in comparison.
I have one property up about 40% and Wong sell because the cash flow is too great! If I had 30, I’d have no problem selling 5.
Very helpful article. I’m considering buying a condo in SF which is currently occupied and needed a good overview of the law.
Do you have a cite/ordinance/law for this statement “With a 60 day notice, you can raise your rent by up to 60% up to market value if needed. Make sure you give your tenants ample warning.”
I was able to find the California law regarding 30 days notice for 10% and 60 days notice for 10%+ but nothing about 60% or how they define “market value”. The reason I ask is this: I’ll want to move in to the condo I purchase, and I think the way to evict the tenant is to raise their rent super high. Otherwise, I’ll have to use the “owner move-in” provision which requires a payment to the tenant of around $5k.
Good article.
For your condos, do you contract a property manager, or do you do tenant screenings and maintenance personally?
I do it myself. It’s pretty straight forward. Two open houses, 30 min windows each, screen the usually ~30 candidates, check their previous landlords, all references, get all financial records and hope for the best!
I’m considering diversifying into real estate.
Not sure whether I’d go with Single Family Homes, or Condos, though. I’d imagine that in San Francisco, condos are the better choice. But where I am, I think SFH’s might be.
Great post, I am just dropping off the letter raising the rent for October today. It was hard deciding if/how much to increase it but it had to be done. This is a business and I need to treat it as such.
Good luck and go make some money!
Just wanted to clarify… did the tenants not KNOW each other before they became your tenants and THEN got married, or were they dating and then got married? :)
Great post and great information. We’re just about ready to rent our basement out and I’m very much interested in buying rental property.. but I’ll wait a few yours for that.
I think its important to screen potential tenants- what are some of the things you use to screen (or ask?)
Both couples knew each other and decided to move in together and found my place. Perhaps it was predisposed, or perhaps the view from my place encouraged them to take the next step!
After the 45X monthly rent = annual income and 10X liquid assets of monthly rent, I try and understand their business and goals.
G luck!
Sam – Would you still recommend First time home buyers to buy houses in SOMA ?
It’s tough in SOMA since there is SO much supply and you are at the mercy of do key’s who don’t pay their bills in a condo complex. I’d focus on District 7, the north end of SF where there is NO supply.
Great article – and timely! I’m about to get into college housing real estate and one tactic that’s been effective with my partner’s previous campus properties was to go just a “bit” more upscale than the surrounding properties. A simple yet effective perk is flatscreen TVs in all the apartments. These days, they only cost a few hundred bucks and if they break it they buy it. Many other landlords just refuse to put a dime into the places, especially on something that’s not a safety requirement.
That sounds like a good tactic to me. Good luck with Animal House! What about a keg room and stripper pole?
Net present value is an interesting way to view the rental properties value. What about cash flow or cap rate? Are you receiving a cash flow after expenses? Of course, San Francisco has tons of renters and is an awesome market in that regard.
The 2.1% is the cap rate used in this example to illustrate what happens to the capitalized value of the annual income when rates go down.
Definitely cash flow positive. It’s hard not to be when rents have risen 50% and the mortgage expense has gone down 32%!
But more so than the widening spread is the illustration that rents and mortgage expense can stay flat and thanks to falling interest rates, rental property values have skyrocketed.
DH is still working on building his business. I’m a sugar momma. I wish I could have a rental property but our savings rate is down to 25%, boo. Oh Seattle.
/jealous
25% of after tax savings is pretty darn good to me. What was it before?
I’m looking forward to getting back into rental property in a few years. (Gotta decide where we want to live long-term first, since I want to be a local landlord.) Long term, good renters are so great. What strategy do you use to attract them?
I really put some good effort into marketing, after making a good effort into buying the ideal place. Once you have a money location property, it almost sells itself. Your job is to get as many people to come look and bid, so you can choose the best ones.
I absolutely love the rental property business!
As you mentioned, it is important to configure financial ratios, it’s just as important to treat your tenants as you would for a customer in a business. After all, they are your only paying customer!
I think a good way to raise rent with out the guilt monster, is to invest to improve the property and structure. Making it more enjoyable to live for the tenants, like improving the carpet or upgrading to better home appliances can easily help you raise the rent.
It’s a good idea to evaluate the extra investment you put into the property and figure out how much more you can charge per month. I know it wouldn’t be that much more money a month, but any extra is always a good thing for business and also a good way to keep your tenants happy.
That’s true to invest more, but then you wipe out the gains for the rent increase, at least short-term.
The rational scenario is to never update your property and keep raising rent with inflation.
Even without a rent increase, your property has surged due to a compression in rates. Do the math of your annual income / 0.021, you’ll be amazed.
Sam,
I have been thinking along your lines of analysis, this applies to the income produced by your job as well! 5 years ago making $100k a year by working was like having a $2M portfolio generating risk free income (when 10 year treasures were 5%), now the same $100k a year requires a portfolio of $4.5M (as 10 year treasures are 2.2%).
So the question is, do you feel 2.5X “Richer” by working in your job compared to 5 years ago… ? Me neither.
In a way though the Fed is accomplishing the goal of forcing people to move to other assets besides bonds and CD’s because of the extended zero interest rate policy. I don’t think there is a way out, look at Japan and how long they have been stuck with a zero rate policy. I guess it doesn’t end until the debt gets defaulted on, and that should happen in Japan before the USA. Then will be the time to wake up and get nervous!
-Mike
IWhich is why income producing assets such as property, and our online business are worth that much more.
You’ve actually got it backwards Mike. Our income now definitely has made us more wealthy with rates lower! Your $100k annual income is like having a $4.5 million portfolio now vs just a $2 million portfolio! Working now is more rewarding than ever! Human capital going through the roof and the skilled and ultimate worker is getting that much richer.
Savers lose and retirees lose, investors and income producing assets win!
I don’t know if I’ve got it backwards, Sam.
Do you feel more rewarded working now than a few months / years ago? Have your expenses gone up or down since then?
Most of the people collecting yields on fixed income didn’t just invest now so they are still living large on their 5-7% interest rates, plus the value of their bond just went up if they would like to re-sell.
I maintain that a zero interest rate policy is not good as it skews decision making in the wrong direction. One could argue that formation of capital requires a positive real interest rate.
-Mike
I feel way more rewarded now bc rates are low. My biggest costs (primary and rental mortgages) are 30% lower in the past 8 years thanks to low interest rates. All my rents have gone up 30-50% in the same time period, online income is rising, and full time income has gone up. Each dollar anybody produces has a capitalized value much greater now too!
Wouldn’t you feel wealthier? I would say 95/100 people have the same scenario above who own rental propert and work. Practically everybody has much more wealth now than 8 years ago.
Sam,
I need to disagree with your statement – Savers lose & Retirees lose.
You need to be a saver to generate capital which you can then use to invest. Savers never lose from this perspective. As for the retiree on Social Security or a fixed pension, the value of their underlying “portfolio” generating income just went up by a factor of 2 as well!
Yes, the only ‘losers’ are those who are piling into 10 year treasuries as an investment vehicle. It is ironic because given the level of debt the US holds, and the fact that it is growing, and the fact that the outlook is negative with an AA+ rating, one would think an investor should get a better return. Especially when they can buy a 1 year Greek bond that yields 50%+!
Crazy times!
We are talking snapshots in time. I, too, am a saver and am LOSING big as I can’t find CD rates higher than 2.6% right now when I could get 4.5% all day 3 years ago.
If you are a retiree who depends on fixed income, you are losing. But if you are working, you are way winning.
I hate to increase rent on good tenants too, but from what I understand it’s best to get them used to incremental increase. Even $20/month is better than saving up to increase later. Our rental market is doing OK. I see rent picking up a little bit this year because nobody is buying. The real estate value is still going down in our area. :(
Is it though? That’s kinda the point of the article Joe. Read the section about how real estate values are positively affected by the collapse in the risk free rate. You’ll be surprised!
Good point. Expectations game. I don’t promise improvements, just that the place will continue to be in the same condition as always for what they are getting. A lot of that has to do with them too. So the responsibility is on them to maintain. If you have normal enough tenants who know what’s going on in the economy, they will notice rent increases and read the papers. My tenants know they have a $200-300/month deal, so they should do their best to be good tenants.
Moving is a PITA!
I usually have escalation clauses in my lease agreements, with an option not to exercise each year. I agree with the idea of comparative analysis. Providing this, and then showing where your rent stands relatively is helpful in selling the rent increase.
Question:
I understand not including operating costs/taxes etc. in the analysis for simplicity sakes, but truth is one can never own a property free and clear in the US. There will always be taxes. As a business, landlords will always have operating costs as well. So why not plug an estimate for this and run the analysis to get a more realistic “value” for the underlying property? Although $37/year sounds good, what is that number truly and therefore what’s the underlying value required to generate that return?
The illustration is for the sake of demonstrating what happens when cap rates compress. Either way, the percentage increases are roughly the same. I didn’t want to put too much stuff into the calculation as then it would get too hairy.
We can assume a net operating income margin of say 80%, so take $37,000 X .8 = $29,600. $29,600 / 0.021 = $1,409,000. One should add on at least a 1% risk premium, so 29,600 / 0.031 = $954,000. That comes very close to what the real value of the property likely is.
The percentage increase is the same though. I calculate roughly a 450% cash-on-cash return since 1/1/10 on 20% down. Landlords don’t realize that their asset is worth much more than they think thanks to rates collapsing!
yes, makes sense
on another note, 80% NOI seems too high no? or is that normal for the san fran market?
Depends where you are along the mortgage schedule. See what happens when I introduce more and more variables? Gotta keep things simple IMO as then I start to lose folks.
It is a slam dunk with the right location and the right tenants. I think the problem is, people are eithe scared or don’t have enough money to put 35% down yet, as that is the requirement.
Where do you get 35% as the required down payment? We’ve been buying rental houses for 20% down with traditional bank financing. The rates are very slightly higher than if we were buying as owner-occupants.
I’d love to buy a bigger apartment building – 10 units or more – and I’ve heard that financing for something like that works differently (you go through commercial lending procedures) so that may be an option at some point (especially, as you mention, through a 1031 exchange).
For rental property in SF, especially the $750,000+ market, banks require 35%. Good to hear you can do 20%! 20% is only for primary res.