The best Lessor-Lessee relationships I’ve seen start with a professional foundation, including annual rent adjustments, and clear and enforced house rules. A mistake I frequently see housing providers make that puts them at risk and negatively impacts the value of their property is blurring the line between being a friendly, professional, service-oriented housing provider and having a personal relationship with their tenants. The good news is, it’s easy to establish a healthy relationship with renters. The following are some of the missteps I’ve seen housing providers make, the risks and impact, and effective solutions.
Renter Selection – Our Words Matter
Oftentimes, the friend vs. friendly line starts to blur during the application process when the property owner ‘gets to know’ the tenant. Initial conversations with prospective tenants are an interview, rather than just getting to know them. The goal of the conversation, the credit check and the rest of the selection process is to get enough information so that the housing provider can evaluate whether the prospective tenant is likely to:
- Pay rent reliability and on-time
- Take care of the property
- Not create a nuisance to the owner or neighbors
After the interview and credit check, the owner lets the applicant know that they are selected to be a tenant. The mistake I often see is that the housing providers expresses that they “liked” the candidate the most. This communicates a personal decision, and already weakens the owner’s ability to manage the property, adjust rent and enforce rules. This can also open up the housing provider to perceptions of violating Fair Housing and discrimination laws.
Instead, let the tenant know that they were the first qualified applicant to complete the screening process so they have the first opportunity to sign a lease. This approach is in line with Fair Housing Laws and it establishes that this was a process-driven business decision and sets a foundation for a professional relationship moving forward.
Managing the Relationship
Another potential problem that arises if you select a tenant because you “like” them, is that now the tenant feels that since you care about them, you won’t raise the rent. ‘We’re friends, right?’ I’ve had many clients tell me that they’re the “nice” landlord and they have “good” tenants so they never raise the rent. Tenants often reinforce this sentiment by sharing stories of financial hardship or other life challenges that they hope will make it too uncomfortable for the housing provider to discuss rent increases. The tenant may also share stories about how well they care for the property “I unclogged the garbage disposal…’, ‘keep the yard tidy…’. Never mind that these are often part of the house rules and/or normal care for the property.
Seeing the Bigger Picture
Adding to the challenge, property value is strongly related to actual rental income, and while owners don’t mind being soft on rent increases, when they come to me asking them to list their property for sale, they want to sell if for the highest price possible. Having a real estate agent who knows how to market the property to investors will help a lot, but when it comes to investment real estate, if an apartment building has below market rents, it can add up to hundreds-of-thousands of dollars in lost sale value, especially now that there are California statewide rent control laws and sometimes even more restrictive local rent stabilization rules.
Following Successful Business Practices
Adjusting prices to market is just good business practice. It enables property owners to maintain their property for the benefit of everyone. Rent increases should be viewed as a business decision and if you want to keep your rents at market value and assure that your property retains its maximum value, the tenant should view you as a business owner not as a benevolent friend.
The key to avoiding this is to establish a business-like interpersonal relationship from the get-go. For most of the smaller “mom and pop” housing providers, investment real estate is their side business, not their primary job, so they don’t always approach it with a professional mindset.
From the beginning, make sure that each interaction with your tenant you are friendly but professional and treat this as a business relationship. It’s too easy to get too personally and emotionally involved when you’re dealing with someone’s home. A professional relationship means setting expectations that there are performance and financial expectations in both directions.
Would You Hand a Stranger $500 A Month?
I often ask clients who feel uncomfortable with the idea of raising the rent every year, “Would you walk down the street and hand $100-$500 to a stranger every month, or would you rather have that money so that you can reach your personal financial goals or to be able to help your family?” When you don’t keep the rent at market value, you’re not only giving money away, you’re actually damaging your relationship with your tenant and devaluing your property. You’re confusing the housing provider’s professional relationship with a one-sided personal relationship and limiting your ability to re-invest in the upkeep of the property.
Many of us have learned the hard way that the quickest way to lose a friend is to lend them money and then expect it back. With the same irony, below market rent doesn’t buy you consideration when you one-day need to raise it. When you raise the rent on people with whom you’ve established a friendship, they usually take it very personally which I’ve seen lead to vindictive damage to the property, anger towards the property owner and they leave under very hostile circumstances creating a lot of stress for everyone involved. It’s a scenario I’ve seen far too often, but it’s avoidable.
Better For Everyone
To maintain a respectful and mutually beneficial relationship with your tenant and maintain your property value, keep the relationship professional and keep the rents at market value.
Do you have any horror stories of tenants who took it negatively when you raised the rent, or tips related to the topic? I would love to hear from you.
For questions or comments, I can be reached by phone at 714.330.9999, by email at [email protected] or visit my website at www.InvestingInTheOC.com. Mercedes Shaffer is a realtor with Pacific Sotheby’s International Realty and specializes in multifamily investment real estate and 1031 Exchanges. If you’re thinking of buying or selling, or you would like a free investment property financial analysis contact me! DRE 02114448