Thanks for the Rent Hike!

By Bernard Hale Zick
(Copyright, with right of publishing to MSI.)

There is a real art to property management. I met a student who tells his tenants they can have new carpet for $50 per month increase in rent. If the carpet lasts three years, this landlord figures his profit at 40 percent.

Jimmy Napier once said he charged a $25 rent increase for attic insulation…all voluntary. If it works for him in Florida, it has to be a better idea in Connecticut. I'll bet the local power and light company could even supply you with figures on how much a tenant could save on heating bills.

While thinking on this, I remembered a Jack Miller idea. Jack would write his tenants, and tell them the rent was to be increased by $100 a month. In the second paragraph, he'd say, "however, since you are such a good tenant, and despite the fact that the increase is justified, I'm only going to increase your rent by $50 per month." The last paragraph would say, "I know no one would ever leave for $50, but to benefit us both, if you'll paint the house, I'll buy the paint and give you a $25 a month credit for your work." Thus, he ended up with a tenant that's happy with a mere $25 per month rent increase, and a house painted for free!

I have two houses on the same block in Dallas. The management has been less than super. One house needs cleanup, and I had not met the other tenant until recently. On my last trip there, I finally met the tenant, and discovered that he owns a house fix-up company that works for banks and realtors. I gave him the clean up contract for the house down the block. He's charging the same as the management company had bid. (I like putting money in a tenant's pocket for a fair price in return for good work.) I told him he could rent out the place for me when he's finished and, in return, I'd pay him to manage it. He'll get $35 per month for management services when the house is leased, and $100 more if he gets it leased out this month. Next month, the lease fee is $50; the third month $25. He's very happy.

Of course I have a Real Estate Broker's license, and have a property management company I control. I use that to manage my properties and those of students that come in on deals with me. But what do you do with out-of-town properties? I much prefer buying more than one property in an area, and getting one of the tenants to do the work.

For example, on one of two houses I own in a distant location, I was paying $50 per month per house in management fees--rented or not. I am now saving $50 per month on his house, and $15 a month on the other--and no fee for the vacant month--for a savings of $815 per year; figure: (50 + 15) x 12 + 35. (The fix up costs came to $750.) Besides, the manager I fired had moved his office, and was now 25 minutes away from the property. He had told me he'd moved, but never told me how far.

Sometimes having tenant managers makes more sense than hiring professionals--especially when only two or three houses are involved. (Of course, if you live in Houston no one does better property management than me!)

Property management calls for creativity too. I once put a loft in an office for a tenant, and raised his rent enough to pay for the loft in less than two years.

I often inventory tenants' skills, and try to work deals. Two examples of this: One person built fences; I bought the materials, and he borrowed the tools from his company. Another tenant hung wallpaper for a living; he wallpapered one of my offices in exchange for my consultation services for his mother--she needed advice about selling her house.

The following is a list of some things that tenants might pay for with a rent increase: a garbage disposal, carpet, drapes, landscaping, new shelves, air conditioning, a patio or deck, an extra bath or closet, etc. Just be sure that the improvement has lasting value, and that it will pay for itself with this tenant. The value should come from charging higher rent with the next tenant or by increasing the property's marketability (shorter vacancy because of upgrades compared to the competition at the same price).

For instance, adding a half bath will definitely increase rent from the next renter; however, an improvement like landscaping is risky--plants can be left to die. Turning a garage into a workshop is also, more than likely, a loser because it's too specialized for most tenants' needs.

What do tenants want? Write them a note and find out--be sure to enclose a self-addressed stamped envelope. In the note, ask what needed repairs or optional improvements they would be willing to pay more rent for. Besides, if you ever had to take the tenant to court for delinquency, and the tenant claimed you didn't listen to his complaints, you can show the judge that you poll your tenants once a quarter.

BZ