Owning rental properties is a business, just like any other. As such, we rental properties owners must consider important financial metrics such as Effective Gross Revenue, Vacancy Rates, Operating Expenses and Net Profit. All this adds up to performance in terms of Cash on Cash Returns, Cap Rates, Gross Rent Multiplier and Proft Margins. In other words, it can be complicated!
Too often we rental property owners take a relaxed approach to our financial performance and consider intrinsic value (great tenants) far more than extrinsic value (asset value, revenue performance, etc.). Said differently, we often keep rents low to hold onto great tenants and ignore market conditions at the expense of our financial performance.
If this sounds familiar, you may want to reassess your approach.
Please don’t miss hear me: Doing what you can to keep great tenants is both the right thing to do and it makes great financial sense. However, substantially below market rents ultimately leads to pain, usually on both sides of the issue. Secondly, if you own rental properties in Portland, Oregon, you are about to face a tax tsunami in the form of property tax increases, the likes of which we haven’t seen in awhile.
Consider the rapid increase in home values and the subsequent assessed value increases many of us will likely see. More substantially, the voters in the City of Portland passed three proposals that will impact our tax bill. In November 2020, three new measures were voted in that will be funded by property taxes. They are:
Measure 26-213, which will fund parks and recreation. The five-year tax levy will allow Portland’s Parks & Recreation Bureau to safely reopen community centers, pools, and rec programs in the wake of the pandemic, and funds programs for low-income youth as well as parks maintenance. The measure will add $0.80 of property tax per $1,000 assessed property value.
Measure 26-211, which creates a Multnomah County library bond. Funds will go toward expanding and renovating eight existing libraries, building a new “flagship” library in East Portland, and other facility upgrades. The bond will be funded by a $0.61 property tax increase per $1,000 of assessed value.
Measure 26-215, a Portland Schools bond. Funds will go toward replacing and renovating four schools in Portland School District, adding capacity for alternative schools, creating a culturally-responsive community plan, improving schools in North/Northeast Portland, and adding security and seismic safety improvements across the district. The bond will cost property owners $2.50 per $1,000 of assessed value; however, because a similar bond was passed in 2017, this is not an increase over what Portland property owners are already paying toward Portland school bonds.
And finally, it looks like inflation is here, at least in the short term.
So what’s the answer? Well, it’s complicated for sure, but raising your rents must be part of your consideration. If you agree, consider the following approach to help reduce turnover:
Do your research. Look into the market in your area to determine what fair market value is for your rent. This will help you determine what is a reasonable monthly rent for your place. Realtor.com can be a helpful place to estimate rent prices in your area based on location and type of rental.
Keep it simple and be fair. Do your research and decide on a fair, reasonable number to bring your unit up to market rates. But remember, if the rent increase is well above market value, tenants will probably leave.
Be courteous and firm. If you’re worried about losing your tenants due to an increase, you can give them an informal heads up that a formal rent increase notice is on its way. Indicate that you value them as a tenant and hope they continue renting with you, but that when it comes time to renew the lease, there will be a rent increase.
Give a reason, even if you don’t have to. Your tenants are voters too, so don’t be afraid to include recent changes to our property tax law as a reason for the rent increase. If you have improved the property, include general language about the improvements you have made. This communication doesn’t need to be complicated, but it will help when the tenant considers leaving or staying and paying the new rent.
Find a template you like. It can be difficult to write a formal letter informing the tenant of a rent increase. Be sure to find a template that meets your local laws.
As always, know your laws. Be sure whatever rent increase you decide to give does not infringe upon any state or federal laws.
As with most issues in our industry, there is no one right way to approach this complicated issue, but the need to stay on top of your business in an ever changing world, is the one thing that never changes
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