Is there a way to increase the overall rents in your building without increasing your vacancy rate? Is there an art to establishing rents? You bet!

Contrary to majority opinion, rents for a particular building are not established arbitrarily by "the market". Let's take an example of an eight unit building in which all of the units have: identical floor plans, 500 square feet, one bedroom, one bath, and an enclosed patio.

Often rents are set by determining the price for which the competition isrenting similar units. Let's say it's $480 per month. Then they would make a determination as to how their units compare.

If an owner feels his units are more desirable than the competition, he will set the rents accordingly; for our example, let's use $500. Once established, the units will be offered at that rate, and if the units rent within a time period which is comfortable to the owner, that's fine. If they do not, he will determine that the rents are too high and decrease them until the response from prospective tenants improves.

Experience teaches a better way - a method not dependent upon the market but rather based upon the unique relationship between your building and the clientele who favor it. First, let's look at some parameters. All tenants are not your potential clients. Most renters will, for whatever reasons, prefer to live in another building. Your market share is simply not the total pool of available renters. On the other hand, those people who favor your building are not readily transferable to most of the vacancies available in the marketplace. They are yours to attract, to retain, or to lose.

The secret to increasing rents is in your ability to see your units through tenant-eyes rather than owner-eyes. The owner of our eight unit building will tend to see the project in its entirety. Indeed, this is often necessary for an owner. On the other hand, the tenants concentrate their view on one unit - the available unit. Certainly, each amenity is considered but only in relationship to "their" unit. The same is true of the relationship of the afternoon sun, the view from "their" windows, the distance to "their" parking space, etc.

For the tenant, everything is reduced from the macro to the micro. All of a sudden, our eight unit building is not an eight unit building. It's a home within a building. Is this one unit the one which overlooks the garden or the trash bin? Does this particular unit have neighbors on one side, or two, or three? Is the neighbor's barking dog just across the fence from this particular unit? Is there constant street noise? Do the high winds slam into this specific unit?

Once seen through tenant-eyes, it becomes clear that setting rents based upon the building itself, $500 per unit in our hypothetical case, disregards the unit's individual personality. When the advantages and disadvantages of each individual unit are considered against the "average" unit within the complex, the result can invariably be adjusted to resemble something like following chart:

This is the usual result: an increase of 10% to 15% in income without added expense. The result? Clear profit shifting to the bottom line - an increase in the properties value, in thiscase, at a 9% cap rate, of $6,600!

Hidden benefits of this pricing system are in better tenant relations (hence better retention) and the elimination of "problem" units. Tenants know their rent is a certain price because of the advantages and disadvantages of their particular unit. There is no favored status, no perception that the owner is treating one tenant better than another. Many tenants will grow to love "annoying" characteristics of their unit if they are able to save money. All this comes from walking in your tenant's shoes... all this from seeing through tenant-eyes. -

MIKE HESSE, CCIM, CPM
Real Estate & Investment Specialist
DIRECT - 720.581.2222
online at www.MikeHesse.com
email Mike@MikeHesse.com