The local coffee shop was unusually quiet at that time of the afternoon. I hesitate to have meetings at coffee shops because they are too loud and not very private. The rental owner I sat across from reached across the table and handed me his rent roll. I studied it for a moment and looked up at him. He knew what I was going to say. He sheepishly smiled and stated, “Yeah, my rents are pretty low.”
With all the noise from the liberal media, tenants’ rights activists, and the legislative body in Sacramento, one would think that every rental owner is charging exorbitant rents for their San Diego County apartments. But as an apartment broker who sells apartment buildings, I study income and expense statements on a regular basis, and find this not to be the case.
If you want to live two blocks from La Mesa village with a view of Mt. Helix and pay just $1,000 month for a two bedroom apartment, I have a place for you. You prefer uptown? How about a nice two-bedroom apartment in University Heights for $1,370 month? Want to be closer to the ocean? How about a two-bedroom unit in Pacific Beach for $1,000 month?
There are a number of wonderfully kind and generous rental owners and landlords in San Diego county that quite frankly don’t get their due in today’s socialist press. Most of the independent rental owners I meet with are charging between 20% – 60% below market for their rentals. Online rental websites like Rent Jungle and Rent Café claim the average monthly rent in San Diego is $2,237 per month. This is fairly accurate according to the Southern California Rental Housing Association 2019 Vacancy & Rental Rate Survey. According to the survey, the overall weighted rental rates for the San Diego Region is $1,948. In the City of San Diego, the average rental rate is $2,132. As you can see, the delta between my generous client in Pacific Beach and the city average is extreme, almost $1,132 per month.
There are a number of reasons – as an investment property owner – you might consider raising your rental rates. For the sake of brevity, I am going to now cover what I feel are the three most important reasons.
FOR YOUR TENANTS SAKE – Yes, you read that correctly, for the sake and well being of your tenants. As a San Diego rental housing broker, someone who works with investors who buy and sell apartment buildings and rental properties in the San Diego Region, all too often I see the tenants lives disrupted because their current landlord has kept the rents extremely low. And when that tenant needs to move out or a new owner comes in, they are simply not prepared for the reality of what the true market rates are for a similar unit in the area.
FOR YOUR OWN FINANCIAL HEALTH – When you purchased this rental property, you likely purchased it as an investment property. When you bought it as an investment you likely planned to generate income from it. Unfortunately, many independent rental property owners who are managing the property themselves form a bond with the tenants and find it difficult to raise rents. I see this quite often. Having a caring heart for Ms. Jones in Unit A with the cute dog is not a bad thing. The problem lies in the fact that all of the other expenses associated with owning rental properties continue to climb. Water bills, utility bills, the cost of up keep and maintenance, they do not have caring hearts and will continue to eat into your profits. When we conduct a thorough broker opinion of value (BOV) and cash-flow analysis for rental owners, many who thought they were making a good income from their property are shocked to see how small their income is after the expenses are taken out. Especially considering the amount of time that is spent managing the place themselves.
FOR YOUR CHILDREN’S AND GRAND CHILDREN’S SAKE – Some rental owners tell me they simply don’t care, they love their tenants, and they don’t want to raise the rents. I have been told many, many times, “I don’t need the money, and when I die, my kids can deal with it.” The challenge I run into quite often is when the owner really does die, and their children decide to sell the property, the value of the property is lower than anticipated. When you sell apartments and rental properties, the value is determined primarily by the income the property generates. The common measurement used for placing a value on income properties is the Gross Rent Multiplier or the Capitalization Rate (Cap Rate), both of which are determined by the properties gross monthly rents. Placing the property on the market and achieving the maximum sales price for your children and grandchildren’s inheritance is largely going to be determined by the properties current monthly income. And, with the possibility of statewide rent control measures hitting our market, it may take years to raise rents to the point where you are able to achieve a decent sales price.
In closing, am I recommending that you perform a massive rent increase on Ms. Jones in unit A who has the cute dog and is always so very friendly? No, that’s not what I am recommending. But as we’ve discussed, keeping her rents stagnant isn’t helping anyone. During my training as a Certified Commercial Investment Member (CCIM) we used an annual 3% – 5% rental increase on many of our case study proformas. This would allow the rental owner to stay ahead of inflation and keep the rents moving closer to market rates without shocking your tenant’s finances with big rent increases.
If you are unsure where your rents land on the marketplace, our complimentary BROKER OPINION OF VALUE includes a rental survey. If you are interested in receiving this service, please contact me via EMAIL or call 619-483-1031.