Justin is the author of Rental Secrets, a guide for tenants on how to work with their landlords to keep their rent at reasonable rates. I thought this would be an interesting discussion to have since most of our listeners are investors and are on the other side of the table. The strategies that you hear about in this podcast may help you keep a valuable tenant while having them help with your operations.
Landlords, especially the new ones need to think first before raising their rent. Charging top dollar slows down opportunities because it increases turnover and can potentially increase maintenance costs. They should think about how to properly position their property and the amount they charge. When you charge high rent, you have to remember that it is revenue when in fact, what you want is profit. Profit is the real meat of the deal. People need to focus on this and not so much on the top dollar which creates lots of turnovers.
Tenants should understand that there are services landlords need to keep the business running. Examples would be landscaping, carrying out the trash when somebody moves out, etc. One of the opportunities for renters to lower their rental cost is to become the landlord’s on-site property manager for the smaller apartment buildings. This allows the landlord to see who can leverage the work instead of going on-site. Instead, he can choose to delegate it to someone else. This is one of the practical things that tenants can help their landlords.
When tenants become the on-site property managers for their landlords, it can potentially lower their stress levels and they end up having the biggest profit in the end. Doing this makes life easier for the landlord where they don’t have to deal with tenants on a weekly or monthly basis. It can even lower turnover costs because there is someone on-site who they can delegate the work to. Tenants turned on-site managers may even decide not to leave because they’re happy being there. The idea that someone is living in the property that could keep an eye on it, maintain and manage the property is enticing.
Landlords should value the continuity of rent cash flow. If you lose a month’s rent, it’s lost forever. For example, if you decided to raise the rent by 200 bucks a month, renters would often think of moving out. They think they only have two choices, take the 200 increase in rent, or move out. It’s a very binary decision for a lot of renters. However, he explained to renters that it’s not a binary decision. Instead, there’s a spectrum of options at play. When renters talk to their landlords about that spectrum of options it leads them to save money and at the same time benefit the landlord.
As a landlord himself, he would rather accept something than having someone move out. He said once a renter moves out he will have to face lost rent due to vacancy. Which for a lot of time would take another month to fill. Landlords should understand that they don’t get any money until the other person signs the lease and takes possession of the apartment. It’s only after they move in that landlords start collecting money to pay the bills. Otherwise, the rest of the time, you’re just holding a deposit, and deposit is not their money, it belongs to the renters.
Gather data from the market to understand what’s going on in the marketplace before talking to the landlord because only after doing this will you be able to have an intelligent discussion with their landlord. This conversation can be done either personally or over the phone. However, for this transaction to become successful, it must be written and signed on paper. Because, after all, a lease is just a contractual arrangement. The conversation between you and the landlord lets you speak from the landlord’s perspective.
This will allow you to give them a clear view of things like: what the costs are, what are the trade-offs and why it’s better to accept the $100 or $150 rental and keeping the tenant is much better than to incur the cost of switching to another tenant. You have to let the landlord know the downside if you move out for a month because the turnover cost and vacancy would be expensive. It’s not just the cost of lost rent but other maintenance like cleaning the unit, doing the repairs, etc. these costs can never be offset until you get the next tenant. This takes time and time is not your friend when you’re dealing with vacancy.
Your negotiation with your landlord should help them see that they could save more money from your transaction otherwise vacancy costs will be eating away the profitability of the property. In real estate, no two apartments can occupy the same space. Each property is different and that’s why people should look for properties that have a nice view but not in a rundown property.
Apartments that are not being rented are coming into the leasing meeting thereby leasing agents are in trouble with the boss. Because everybody is getting tired of an apartment that isn’t renting, by becoming the on-site manager of the property, you get to become the hero for the leasing agent.
Sean has experience renting an apartment in Los Angeles and the owner didn’t raise the rent too much but when they did it was because they wanted to sell the property. The reason was they wanted to increase the NOI or Net Operating Income. (by increasing the rent the Capitalization Rate of the property also increases.)
According to Justin, the value of the property comes in three different places; 1. Construction cost, 2. Sales cost 3. Income method. With the income method, it becomes easier for the owners to sell the property when there are tenants. That’s because of the continuous cash flow that the property generates. This also raises the value of the property. Although they can still sell the property when it’s vacant, they will have to look for the next tenant while they can raise the rent at the same time. Basically, it all boils down to what work does the seller and the buyer want to do.
It’s also important to realize that this could also become part of their sales pitch. When saying that the property is occupied, it becomes more valuable from the buyer’s perspective. However, this could also become an offset depending on the market value of the property.
Although it’s easier for the buyer to increase the rent when there’s nobody in the property if the rent is just a few hundred bucks below market rate and the renters are dependable, meaning they pay on time, the owner is in a good position to increase the rent in the future. Sean created a video a couple of months ago it’s the California AB 1482, or the statewide rent control for the state of California. (This guarantees landlords raise increases every year.)
Justin confirmed the rent control is already passed. However, the rents are still high. For example; if you’re capped for 5% inflation and the government allows you another 5% inflation that can be passed on, that makes the owner capped at 10%. When inflation is doing pretty well, for 1-2% then you’re looking at a 7% increase. So If you’re renting for 3 grand, a 5% increase is $150, still, it won’t make a lot of difference.
For this reason, the most important thing for landlords to do is to keep the relationship with the renter paramount. Landlords should see the renter as their partner in the investment and that relationship works only when the renter pays the rent.
When you’re looking for a property management company, it’s important to keep these two things in mind.
Because of state-wide rent control laws, there’s a feeling of helplessness and frustration among the population of renters all over America. Often, landlords don’t recognize that they are fueling the creation of laws like the rent control and just eviction. If these laws are not crafted properly, it could actually harm the state itself.
He cited an example about Berkeley California who had strict-limiting rent control laws. Over time, it created less investment in new properties. It led to higher prices on old properties that people don’t want to live in.
In writing his book he emphasized the importance of understanding the levers renters can pull in terms of negotiating with the landlord in order to address the feelings of helplessness and frustration with raising rental prices. He hopes it will reduce the laws passed down by the government that often leads to harmful effects in the future. Renters should not hesitate to talk to their landlords about this kind of negotiation. Instead, they should consider it simple transactions between two adults.
On the other hand, they should also care for senior citizens. Those renting the property for 30 plus years and are on a fixed income. They should keep in mind that real estate is business and is not just for profit. However, it’s also a business where people have their livelihoods. Real estate is the foundation of everything that people do. Take a recent college graduate as an example. He needs a place to live close to the workplace; it supports their ability to work and earn an income.
“Real estate comes like a ripple effect because it’s interwoven to almost anything.” Justin Pogue
Rental Secrets: Reduce Your Rent – Get Better Value – Create Quality Communities by Justin Pogue
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Hey Sean great article, thanks for the great article and podcast! My cousin recommended me Rentulio (https://www.rentulio.com) she got a new rental paying a crazy 20% less in Los Angeles! can you believe it!!? I was wondering if someone else has tried this platform in NYC? Would like to hear your thoughts on the platform...