Raise the Rents, Tighten the Standards

July 22nd, 2015 | admin | Tags:

Occupancy rates stood at 95.3 percent in May 2015. Builders started 1.17 million new homes in June 2015 with a high percentage of those in apartment construction. In fact, multifamily construction has risen 28.6 percent and apartments 16.1 percent in June. Add to that that rents increasing some 16 percent over the last five years and we have the makings of an excellent time for rental owners. So it’s time to think about raising rents and tightening rental standards.

Tighten the Standards
In the doldrums of the last recession, many rental owners ended up forgiving some less-than-stellar credit and less-than-desirable income from applicants, just to fill units. Those days have gone. Of course, not every area has the same occupancy figures. Even so, it’s time to take a look at where you are and decide if maybe times have changed for the better. Some telling questions to answer are: How long do units sit vacant? How many applicants clamor for a chance to rent your properties? How many tenants do you have to accept with your current standards, ones you don’t feel comfortable with?

Let’s start with standards. If you require a minimum time on the job for an applicant, how does that compare with the applicants you are getting now? If most of them have at least a year on the job or at least three years in the same type of work, why would you even consider someone who just started a new job three weeks ago and is fresh out of school (or jail)?

What about credit? If most of your applicants have at least a 700 credit score, why should you even consider someone with a 620? It’s a good time to raise the standards to meet the new reality.

If we could just pick and choose among the pile of applications we get, there would be no need to adjust standards, but we have to rent to the first qualified person who applies to rent or risk a Fair Housing complaint. So if the first applicant meets all the standards, say three weeks on the job and a credit score of 625, then we are obligated to rent to him or her. And if another applicant shows up next day with three years on the job and a 725 credit score, we miss out simply because standards were too low.

Raise the Rents
Ella Neyland, president of Steadfast Income REIT in Irvine, California, is quoted in an Associated Press article last year as saying, “Every single day I have some apartment home in my portfolio that’s up for renewal. As the market improves, I increase the rents.”

She knows exactly how much she can raise rents. The question to consider is how much we can reasonably increase rents. Taking the overall, nationwide figure of 16 percent over the last five years won’t get it. Every area is different. For example, Multifamily Executive magazine reported that the top rent growth area in May 2015 was Oakland, California, with an increase of 14.3 percent in just one month, followed closely by Portland, Oregon, with 12.2 percent. Even the 10th highest rent growth, Las Vegas, was 6.6 percent in June. That may not speak to your area. The lowest rents according to a CBS News report in 2013 ranged from Tulsa, Oklahoma, to Wichita, Kansas. Somewhere in between? Check your own area carefully to avoid pricing yourself out of the market.

Numerous websites report on rental areas’ average rents. One is that has at least 50 cities it is able to provide accurate data for. You can also get a general idea by using Craigslist and averaging out rents. Your own experience may enable you to judge the accuracy of Craigslist figures, as well.

How much tougher should rental requirements be? Of course, they have to be reasonable in that they conform to the situation of not only your area but also individual properties. For example, if an area that still has high unemployment, can’t reasonably require three years on the job, but maybe three to six months at least. Individual properties vary as to the type of tenants they attract, too. The tenant expectations for a unit in a high-income area, with four bedrooms, three baths, a swimming pool, spa, and fitness center reasonably can demand higher standards than a unit in a low-income area with a high crime rate and a community pool three miles away that is closed for repairs most of the time. The point is, the standards have to meet the property and the area.

No matter what, regardless of the local economy and rental situation, four things to always require regardless of the property and what the requirements, are these, and no exception, EVER.

• The application must be completely filled out.
• Income of whatever kind must be verifiable.
• All information on the application must be verifiable.
• Meet and see picture ID from each adult applicant.

And verify everything on the rental application either yourself or through a screening company.

From there, set the minimum standards and have a much better chance of getting an outstanding tenant. Our economy and the rental market have changed, so we can take advantage of it.

By Robert L. Cain

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