Note from Tami: Still true today!

By Brad Marting, CPM, CAPS 2000

It is often said that establishing maximum rental rates can determine the success or failure of a multifamily housing investment.  But it is more often said than done.

Historically, rents have been increased based upon overall occupancy percentage.   This is reasonable because occupancy is an indication of supply and demand.  However, waiting for ideal occupancy has made decision makers hesitate in raising rents.  The time lost during the decision-making process creates missed opportunities.

While market forces, the economy, competition, vacancies, and concessions often have provided an excuse to hold back on raising rents, none of these factors has as much of a negative effect upon rental rates as does fear – the fear of raising rents.

The following situation is quite common: The financial reports for January are received February 15^th, and occupancy was 94 percent.  That’s a little low, and we don’t know if rents have truly stabilized so we wait another month.  The financial reports for February show occupancy was 94 percent again.  That’s very good, but we had probably better wait another month.  The financial reports for March reveal that occupancy fell to 92 percent.  Better not raise rent now, we’ll wait another month and see.

The financial reports for April are received May 15^th, and occupancy increased to 95 percent.  Now things are looking good, but we’ll wait another month just to e certain it was not a fluke.  The financial reports for May show occupancy was 98 percent.  It is felt rents have stabilized at a sufficiently high occupancy percentage, and rents are increased.  Unfortunately, five-and-a-half months have passed without an increase, and only 2 percent of the units are now available to receive the rental increase (98-percent occupied).

No wonder rental income is growing very slowly.  As seen by this scenario, when determining rental rates, reaction time is critical, and time is money.

The Marting Solution

During my more than 20 years in property management, I have sought an objective tool which would assist in determining the maximum rental rates.  The system needed to be simple and easily administered, so I developed one myself.

I have been using and improving the system for more than three years at different properties across the country.  Rental increases upon lease renewal of $50 to $125 per unit, per month have been common.  The system is very simple, easy to use, and is based upon the law of supply and demand.  It takes less than 30 minutes per week to do.  I call it the Marting Rent Matrix System (OK, I’m not the most creative person).

It is necessary to make a couple of simple assumptions in order to use the Marting Rent Matrix System.  First, it is assumed rents are market driven (supply and demand).  Second, it is assumed that for each percentage of occupancy, there is a corresponding level of acceptable rental rate.  Note that any property can achieve any occupancy level of rate adjustments are unrestricted.   If $1 were charged for monthly rent, the property would certainly be 100 percent occupied.  If $10,000 were charged for monthly rent, the property would likely be 100 percent vacant.  The question remains as to what rental rate will maximize the income to the property for what desired level of occupancy?  Experimenting with the Marting Rent Matrix System will help find that point of maximized rents.

Figure 1:  Marting Rent Matrix

* Percentages have been rounded up for illustration purposes and may not appear to add up.

** More data on unit types can be found in Figure 1A below.

Figure 1A:  Marting Rent Matrix

How it Works

Basically, the system evaluates the rent and occupancy levels for each subgroup of units on a weekly basis (remember, reaction time is critical).  The initial setup of the system is very important:

• Break the unit mix into smaller, homogenous groups that share common characteristics, such as one-bedroom upstairs units, two-bedroom one-bath downstairs units, etc.
• Use 20 to 60 units per group.
• Use six to nine groups.
• Count all units – include models, employee units, guest suites, etc.
• Use base rents – you can add premiums later.
• Set a benchmark occupancy percentage – the overall occupancy percentage you desire.  (Note:  100 percent occupancy is not necessarily a good thing; it merely shows that you are not maximizing rents, and it’s time for an increase.)

Realize and accept there will be exceptions for longer-vacant, hard-to-rent units.  These units receive a special concession which does not affect the rest of that particular group (usually units more than 60 days vacant).

Once the Marting Rent Matrix System is set up as a Lotus or Excel spreadsheet, as in Figure 1, simple enter the number of vacant, occupied with notice, occupied, vacant but rented, etc.  The system does all the math and shows the occupancy percentages instantly.  Each group, “A” through “Z”, is evaluated based upon the potential vacancy percentage (number of vacant units plus the number of occupied nits with notice to vacate within 60 days).

If the ”A” group’s potential vacancy is 4 percent, and your benchmark is 95 percent occupancy, you would increase the rent for that group slightly, say by $2.  If the “A” group’s potential vacancy is 9 percent, and your benchmark is 95 percent occupancy, you would decrease the rent for that group slightly, say by $3.  Because the system includes the units occupied with notice to vacate within 60 days, you have this period of time to adjust the rents to the maximum level without incurring vacancy losses on those units.  (Residents are still paying rent until they vacate).

How much to raise or lower rents will vary by property and must be determined by experimentation.  The rents will seek their own levels of equilibrium, and rents will be maximized.  If you raise rents too much, occupancy will increase, and you will lower the rents the following week to the maximum level the market will bear.

One advantage experienced with adjusting rents weekly is that it makes a great closing technique.  The prospective resident is told that rents are adjusted weekly and due to the popularity of this particular style it is likely the rent will increase on Monday.  However, fi they would like to leave a deposit today, we can lock them in at the lower rental rate.  And it’s the truth!  If the unit is in a group with few vacancies, the rent is likely to go up.

Dealing with Skeptics

The system is proven to be effective, but be prepared for resistance form the on-site staff.  I discovered this after visiting one of my properties that had been using the new system for 60 days.  The manager told me she understood the system might work at other properties, but it just didn’t work at hers.

She explained that three sides of her property adjoined a beautiful golf course, and they had always charged a $20 view charge for the exterior units that overlooked the golf course.  She had used the system religiously for 60 days, and what she experienced upset her.  She said most of the turnovers had been in the interior units and, because they had rented so well, they had experienced some substantial rent increases.

“Now the interior units are $20 higher than the exterior units,” she said.  “Your system doesn’t work at this property!”  I said, “the interior units have increased $40 in 60 days, and the system doesn’t work?”  She replied that it did not because the most valuable units now cost less than the least valuable units.

I suggested she had just learned the most valuable units were actually the interior units.  She personally preferred an exterior unit because she had no children.  I suggested that some people prefer to be able to see their small children playing outside in front of the apartment and also perhaps preferred to be able to see their BMW and Mercedes-Benz automobiles in the parking lot and carports.  Her paradigm and prejudice had previously restricted rent increases.  It was difficult for her to accept the interior units were more valuable and should command higher rent.

Proof is in the Pricing

It takes patience to implement, but the system works because it is based upon simple supply and demand.  I use a different benchmark (target the occupancy percentage) for summer and winter for most properties.  The benchmark can be changed as often as necessary until you reach an optimum point of rate versus occupancy percentage.

You may be surprised at how quickly rents increase initially.  After the system has been used or a year or two, the increases usually become less, however your income stream during that time should increase substantially.  It has worked ver well at my properties.

I purchased a property in November  that did not stabilize occupancy until one year later in April .  One of the motivations for purchasing the property was the belief that rental rates were below market.  A market baseline for January  was established for comparative purposes by multiplying the average market rent of $590 by the number of units in our property.  The market rate was derived by applying percentage increases or decreases as reported in market studies conducted by third-party sources.  While market rates have remained relatively flat for the period, rents at the property have increased substantially.

The rent matrix has been used since the purchase of the property.  The result has been an increase in value of approximately $1.5 million thus far.  These results may not be attainable in all markets, as markets and properties will vary.

Brad Marting, CPM, CAPS,  has 27 years experience managing commercial retail, office, hotel, condominium, subsidized and conventional multifamily, and single-family rental investment real estate property.  Mr. Marting was the President of Northern Indiana IREM Chapter 100.

Offer your residents an incentive to renew their leases early. This can be, and has been, done during an open house, or you can set aside a special month, like February or March, for the renewal incentive. This is how it works:

Advertise to your residents through your newsletter, emails and notices that you are offering a special rental increase if they sign their leases early.

Incentives can be receiving only a $5 increase for signing before the deadline, or even a lower percentage increase depending on the market.

Also, they could receive something for the apartment, such as having the carpet cleaned, having the apartment painted, a ceiling fan, a breakfast bar, or even a discount off the rent for the first month of the new lease.

Professional Equities used this idea and immediately increased their renewals by 10 percent!

Contributed by Sue Hogge

None of us want to pay more money for the apartment or house we are renting. Most of us have trouble increasing our customers’ prices when we ask for a new renewal commitment. One of the things I’ve learned is that perception is reality. So the key to raising the rents while keeping resident retention high is to help your residents perceive that they are getting a bargain.

The Programs: Three months before their lease renewal date, send them a Rent
increase/ Lease notice. Include an early bird incentive to get them agree to the rent increase and sign immediately, thereby preempting a search for a new place to live. For example, let’s say you are trying to increase your rate by 5 percent on an $800-per-month rental unit, which comes out to $40 per month. Send them a rent increase for 8 percent, but offer them a 3 percent discount if they come and renew the lease within the next two weeks, a 2 percent discount if they come in within four weeks, and a 1 percent discount if they come in within five weeks.

Design the letter to outline the savings for each percentage offer. For example:
·    The 3 percent discount would equal $24 per month or $288 per year.
·    The 2 percent discount would equal $16 per month or $192 per year.
·    The 1 percent discount would equal $8 per month or $96 per year.

The residents perceive that they are saving $288, while you’re increasing revenue by $480 per year. The resident may ask for the full percentage of savings during the course of the three months, but that's okay. You still get the same perception and same revenue.

The keys to success are to design and test different initial rent increase notices, incentive pieces, and reminder cards announcing the end of another discount.

Projected Results: You will be able to test this program on a monthly basis and determine its net effect. The risks are small, but the rewards are large. One community that implemented the idea received a 65 percent early bird signing response rate!

Contributed by Rick Brown

Here's a guaranteed way to get your residents to visit the office when you have trouble getting them to respond to your letters and calls at lease renewal time. Have you ever noticed that when the UPS person leaves a sticker on the resident's door, they come running to the office? A post-it note from you will have the same effect. The message should read: "We have a package for you in the office." Present the resident with a renewal gift upon arrival. My favorite gift is a mailbox filled with candy, and a note reading "Don't change your address. Stay with us. Renew your lease today!" Order mailboxes through Oriental Trading. I love this one so much; I use it on the very first renewal contact!

Write and tell us your “Quick Tip” success story. If you have a clever and successful tip, we'd like to hear it. If we select your idea to use as a quick tip, we'll print your idea online or in an upcoming Quick tips calendar or book Plus we will send you a special gift.

Ours is a business of cycles; and believe it or not, the time is going to come again to raise the rent.  In case you’ve forgotten what that’s like, let me remind you that just like every great relationship, the one between you and your residents requires a carefully maintained balance of give and take.  When they signed the lease, you agreed with them that you’d take a specific amount of money in return for giving them a specific range of features and benefits.  Imagine those elements on each side of a scale.  It’s important to remember that the rental rate your residents are paying to live in your community is not an insignificant part of your relationship with them … for many, price is the hottest button of all.  If you’re going to ask them to put more on their side of the scale, you’d better be prepared to define what you’re putting on your side, too, to keep the balance in place.

Now, we all know that every resident is a valuable one.  Not only have you already invested a great deal of time and money and good will—all of which makes that relationship well worth keeping—but losing the relationship will almost certainly cost you more than just the status quo thanks to turnover and marketing.  We never want to reduce the value of our residents to a dollar figure alone; nonetheless, they represent more to you IN that apartment than out of it.  So, how do you propose something as significant as a rent increase without throwing off the balance you’ve worked so hard to create?  There are many proven strategies for raising rents without losing renters, but in our experience, there are a few elements common to all the most successful ones, and they are:

Keep It Real

Remember when you were a kid and you asked your mother why she was making you do (or stop doing) something, and she said “Because I said so!”  You hated that, didn’t you?  Nobody really ever outgrows that.  Add to that the trend of consumers desiring increased transparency, and you might as well just plan to deliver the “why” along with the “what” if you expect them to accept your call for higher rent, and it had better be good.  Be up front about the fact that raising rent is a business decision, the cost of operating your community is continually increasing, and rental rates have to keep up in order for your community to stay successful.  It’s important to couch that in the fact that the key measurement of your success is maintaining a relationship with them.  Your success means being able to continue delivering the features, benefits, and level of service they have come to expect, and absolutely deserve; and that’s where this next part comes in.

Keep The Faith

“Business is business” is only going to get you so far; and frankly, that’s not far enough in a realm where emotions play a leading role.  Your resident didn’t choose your community just because it made great business sense … they were also relying on their other senses.  They liked what they saw, enjoyed what they felt, and believed what they heard when you promised your community’s features, benefits, and services would keep them satisfied better than any other community they might choose.  In the best case, they might have had the word or experience of a trusted friend or colleague to reinforce that decision; but they had no personal proof at that point that you’d live up to those promises until they made their choice and moved in.  If you haven’t been delivering, then good luck with that (there’s a reason we called this part “keeping” the faith … if you’ve lost it, then you need another article entirely).  Of course, if you’ve been delivering at least what you promised, then you’ve demonstrated that their faith was well-placed, and there’s powerfully persuasive value in that.  Build upon that base of faith by reminding them of all the things upon which their original decision was based and that they receive as a resident (a sense of community; clean/comfortable and attractive environment; convenience; amenities; maintenance and other services that keep their life carefree; a professional management staff on a mission and at their service; and the specific things your community offers that the competition can’t claim.  Now, if you’ve been overachieving and exceeding their expectations, you’ve got a powerful ace up your sleeve.  There could be no better time to spotlight the things you’ve been doing that go over and above what you originally agreed to provide.  Added new services?  Upgraded amenities?  Renovated lately?   Those are all valuable items to add to your side of the scale.

So at this point, you’ve explained that you need to raise the rent and why, you’ve reminded them of why they chose your community in the first place, and you’ve maybe even had a thing or two to add to your side of the scale.  It’s time to close the deal, asking them to renew at the higher rate.  You’d never dream of presenting a leasing demonstration without being able to proactively address those concerns, so enter this discussion armed with the same set of skills.  Here it’s important to realize the difference between many of the objections you might have encountered in the original lease process where the resident may have been looking to buy more time or a better deal… strategically, those are offensive moves meant to gain higher ground.  Asking someone to pay more for something they’ve been getting all along is going to place them on the defense, geared to protect something they perceive to be slipping from their grasp. (“Why pay you more when there’s lower rent down the street; and what’s to stop me from packing up and going there?”)

Of course, you know the answers to those questions, so keep them at the ready.  For starters, the cost of moving is high—almost always more than estimated, not to mention the emotional toll of making such a huge change. Those other communities may be luring residents in with lower rent but will eventually have to make the same rent-increasing business decisions that you’re making.  Their level of commitment to meeting and exceeding their residents’ expectations is an unknown value while yours is a proven one.  You have an established relationship with them that you value and intend to uphold to a degree that’s at least in keeping with the increased rate of rent, and with a goal of exceeding it every chance you get.

Keep The Resident

To sum it all up, the most powerful tools you have in raising rent without losing residents are to be clear about what you’re asking and why; and pull out all the stops when it comes to defending your value—all in the spirit of continuing the valuable relationship to which you’ve both contributed up to this point.  If you’ll make those things part of every strategy to increase rents, you’ll keep more residents as a result.

And finally, there’s so much more to be said about successfully raising rents than we could ever fit into one article, so if you want to know more, plan to attend “Million Dollar Listing: Proven Strategies for Raising Rents Without Losing Renters” at Brainstorming 2010 where you’ll learn:  how to effectively demonstrate the value of your community (including features and benefits that are often overlooked); the latest services and amenities that residents want and are willing to pay—or pay more—for; how to outshine the competition and position your community as the best possible choice; leveraging the full value of your brand; the dollar power of outstanding customer service; why a strong sense of community matters; and much, much more!  We’ll see you there!