Why is it important for landlords to keep up with market rent values?

The Sacramento area market rent has increased 30-45% over the past 5 years!  With rent control and rent gouging laws in play, it can take many years to catch up with market rent rates once a landlord falls behind. If rents fall 30% below market it can take 4 or more years to catch up with the market rents with rent caps in place and market values continuing to increase. 
 
This is backed up by data from housing and realtor organizations. Housing prices nationally are projected to raise 6.6% by the National Association of Realtors (NAR), though Zillow projects an over 13% gain this year. NAR also projects that rents nationwide will raise 7.1% in 2022.

Many kind-hearted landlords are inclined to let their rentals fall behind market rent – especially so when the tenant pays well and keeps the home up. They ask, “What harm can come from not raising rents?” Quite possibly, it can be very costly to you and your family. As a landlord, here are some things you should be fully aware of when deciding whether to increase rents. 

Rental market

There is an extreme shortage of rental properties available in the Sacramento area now and we expect that to continue for many years.  When rental demand is high, multiple applicants typically compete for the few available properties making it easy to find a great tenant. Tiner Properties has enjoyed a vacancy factor of less than 1% for several years now. 

Balancing keeping good tenants with keeping up with market rents

While we agree that it is a Tiner priority to keep tenants who pay timely, take great care of the property, and are not maintenance monsters, we have also found that raising rent part way between the current rate and the fair market rate very rarely results in a vacancy while allowing the property owners to stay close to fair market rent value. 4 years ago we raised rents on over 140 properties in a single month and it only resulted in one one tenant giving notice to vacate.  Tenants recognize that rents are up everywhere and moving will not change that fact.     

Resetting rent rates at a vacancy

Rent caps and rent gouging laws limit a landlords' ability to catch up to market rent once it has fallen behind.

The ideal way to catch up on market rent is during a vacancy. While vacancies can be expensive, they are also an opportunity to update the property and bring it up to its full market value. In many cases, the landlord breaks even the first year and is substantially ahead on their monthly cash flow going forward. 

Inflation

The cost of repairs and maintenance are going up rapidly in our inflationary climate and that trend is expected to continue for the forseeable future.   

Treat your rental like an investment rather than a charity

A landlord’s kind heart should not dictate that they must supplement their tenant’s rent by keeping it below market. We advocate keeping up with market rents to protect your investment and your legacy. Owning an investment property is the best way to establish multi-generational wealth. Real estate is an asset that has intrinsic value and is unlikely to have it’s value eroded by inflation. By maintaining rents at fair market value, you can protect the value of your investment property and your family’s generational wealth. 

Leaving more for your family

If your children/heirs inherit your rental property when the rents are far below market rent, it can dramatically decrease the value of their inheritance. Here is a real life example.

About a year ago, I showed a duplex that was for sale where one of the tenants was paying $400 rent when fair market rent was $1200. Even assuming rent values stopped increasing, it would take 13 years of 9% annual increase to get the property to market rent. That’s $9000 per year in lost income the first year, and over $52K in lost income over 7 years. 

Investors knew this and reduced their offers by $50K from what should have been market value for the duplex. The seller was not aware of the loss in value they had created by failing to keep up with rent values.     

Tiner has a fiduciary relationship with the property Owner

As your representative, we look out for your best interest. We protect you financially by providing annual inspections which are accompanied with our best recommendation for an appropriate rent increase.   

If you are looking for a property management company in the greater Sacramento area that looks after your best interests, contact Tiner Properties today.