Maximizing Rent Increases

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In this post I’m going to revisit a topic I looked at in a post dated March 18, 2020: rent increases on turnover. In that post I compared several scenarios in which a hypothetical landlord raises rents by different amounts on turnover. I found that even in high vacancy markets in which large rent increases mean units might sit vacant for a while it makes sense for landlords to keep units vacant and wait until larger rent increases are accepted by renters instead of rushing to lease vacant units quickly at smaller rent increases.

In this post I’m going to look at this topic from a slightly different perspective and compare different timings for raising rents on turnover. Table 1 below shows calculations for six scenarios. Scenario A assumes annual turnover and annual rent increases of $50 (for the purposes of this discussion these rents are assumed to be “market rents”). Scenarios B1, B2, B3, and B4 assume 2% annual rent increases and turnover every second, third, fourth, and fifth years respectively. Scenario C assumes no turnover and 2% annual rent increases. The totals at the bottom of the table show the accumulated rent revenues for each scenario over a twenty year period.

The totals at the bottom of Table 1 make it clear that the market rent scenario (A) generates the largest total rent revenues over time, while the 2% annual increase scenario (C) generates the smallest. But these are both benchmark scenarios. Scenario A emulates a hypothetical market rent unit with a landlord who increases rents to keep up with market pricing. Scenario C emulates a hypothetical rent controlled unit with no turnover (generally speaking, Ontario’s annual guideline rent increases have averaged around 2%).

Scenarios B1 to B4 emulate hypothetical rent controlled units with turnover at different periods. Of these, it is clear that the one which generates the largest total revenues is the one with the most frequent turnover (B1) which allows a landlord to increase rents to market rents most often. As expected, scenarios with less frequent turnover generate smaller total revenues due to fewer opportunities to increase rents to market rents. However, the differences in total revenues between scenarios B1, B2, B3, and B4 is small, roughly one month’s rent over twenty years.

What if landlords didn’t increase rents to market rents on turnover but instead increased rents by some fixed amount such as $50? Table 2 below shows calculations for the same six scenarios as in Table 1 except with fixed $50 rent increases on turnover. Why $50? The amounts by which rents were increased to market rents in Scenarios B1 to B4 in Table 1 range from $30 to $126, with an average of $50.

The totals at the bottom of Table 2 make it clear that in Scenarios B1 to B4 if the landlord increased rents on turnover by $50 instead of increasing rents to market rents they would miss out on large amounts of total revenues. For Scenarios B1 to B4, these shortfalls amount to several thousands of dollars compared to Scenario A.

Summary? The scenarios in Table 2 emulate rent increases made by landlords with imperfect or inadequate knowledge of what the market will bear in terms of pricing and highlight the importance (the necessity) for landlords to have access to regularly updated market surveys to ensure they set prices to optimum market rents on turnover or they may miss out on substantial rent revenues over time.