For Rent by Owner | Landlord’s No. 1 dilemma is determining what to charge for apartment

October 2, 2013

(Kathy Redd)

After recently losing his renters, Colorado-based lawyer Douglas Hsiao is resuming his occasional column on his quest to find another tenant for his Dupont Circle condo.

I recently put my Dupont Circle apartment back on the rental market. One of the most important decisions a landlord has to make is what rent to charge. Setting rent is not as easy as it might seem at first blush.

Given the location and condition of my apartment, I don’t have much problem renting it out. If I left it at the current rent, I would probably have two or three offers on it tomorrow. But this is ostensibly a money-making enterprise and with expenses surging higher, I feel pressure to raise rents.

There are several pricing guideposts for a landlord to follow. However, they don’t necessarily lead to the same destination. I have to set the rent at a point where I can start to get some of the all-important cash flow from the rental. At the same time, I want to leave it low enough to retain a long-term tenant. It’s on the latter that I have faced problems recently.

Tenancies, in my experience, have gotten much shorter in recent years. This is contrary to what a lot of real estate market experts have predicted. These experts have surmised that the economic conditions have created a perfect storm for the rental market. As banks pulled in their horns, the resulting credit crunch left home buyers unable to obtain mortgages. Credit standards tightened so most entry-level home buyers have not been able to qualify for mortgages. This left these potential buyers instead being renters.

Add to this mix, former homeowners have returned to the rental market. After losing jobs or overleveraging their homes, they were foreclosed on or sold their homes at a loss. These woeful cases did not disappear from Washington; they simply moved back in as renters.

At the same time, supply is constrained. Construction of new rental apartments, especially in Washington, came to a standstill over the last five years. Commercial mortgages, which are not backed by government guarantees, dried up. The multi-family developers who did not go bankrupt shelved all their building plans and conserved their capital. Only recently have developers gotten back to building new apartments in Washington, but a significant increase in supply is not anticipated until next year.

As result, we have a Washington rental market, the experts say, where people who have no choice but to rent are chasing after too few rental units in the city. It only makes sense that rents have risen, but renters are staying on longer in their apartments while they wait out the recovery.

Or are they?

With all these market forces at work, my anecdotal experience has been pretty much to the contrary. For my first decade as a landlord, my tenant leases went on for years and years. Except for a short blip around 2002, I think most of my renters averaged around three or four years as tenants of my apartment. Landlord stories like this abound from that time period. One former colleague who also had a rental apartment in Dupont Circle told me that he had the same government lawyer rent his apartment for more than a decade in the 1990s.

Over the last decade, and even after the country began to climb out of the financial crisis that began five years ago, my rental tenancies have been much shorter. I have come to expect that my tenants will give notice after one year, and I have been grateful when I get even a single renewal term. My last tenants are a good example. After moving to Washington last year, they rented my apartment for only a year and then ended up buying a condominium in my building and moving out.

Has the nature of rentals changed in Washington permanently, where shorter-term rentals will now be the norm? When rents top more than $3,000 per month for a two-bedroom in Dupont Circle, is it unrealistic to expect anyone to stay on long term? Or is this a temporary reflection of economic conditions, and landlords just have to be flexible enough in their rent-setting practices to retain their tenants?

Answering these questions are of no small matter to me. If the length of tenancies are price inelastic (i.e. renters are shortening their tenancies for reasons other than the price), then I should just try to charge the highest rent possible based on the need to get as much out of the tenant from a one-year lease. If, on the other hand, a low rent could keep the tenants in place, then it would behoove me to hold back on rent increases or, God forbid, lower rent in order to maximize the length of their tenancies. This would yield a smaller profit but I could make up for it in lower turnover expenses.

So call this year an experiment. Even though my management company, after examining the market and the available apartments recommended that I raise the rent by $200 per month, I decided to hold it at the same rent this year. I want to see if I get more interest from more value-conscious renters who may have in mind staying in a rental for more than just a year or two. It means I will continue to have negative cash flow for the coming 12 months, but if the experiment succeeds, I won’t have to worry about finding another renter for several years.

Read Hsaio’s last column.

Hsiao can be reached via Twitter at @doughsiao.

 

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