Why raise the rent? (Part 1)
There have been several high profile cases in Napa of landlords increasing their tenant’s rent. It is a hot topic whether you are the landlord, the tenant or a concerned citizen. Therein lies a deep conviction, misinformation as well as a lack of information.
I will not attempt to sway your convictions or possible biases as I have my own convictions as well, but rather provide clarity on the topic.
Commercial and residential real estate differs widely, however when a property is held for investment purposes the owner is looking for one thing - financial gain either through appreciation, income or both. Investment real estate should be viewed as a business just as any other. The business person (landlord) is providing a product (a building or space) to a customer (tenant) for a price (rent).
I am not an economist and do not claim to be one so excuse my overly-simplified explanations. A business person’s desire is to be successful as his business plan and strategy are implemented. One view of success may be growth and expansion. Another may be creating a “must-have” product that becomes the standard for the industry. While another may be creating value and receiving the best price for his product.
Whether it is an office building, chocolate chip cookie, iPod or used jeans at a garage sale, the value of a product is what someone is willing to pay. This is determined by several factors, in our case price (or rent), is determined by location, usability, square feet, amenities, quality of construction, development costs, desirability, demographics and demand are possible criteria.
As a result of the “new” desirability of Downtown Napa, the demand for real estate has increased. There are many reasons for this, which I will save for another article. It is evident that restaurants, wine bars and retail shops desire to be in located in Downtown Napa and are willing to pay more to do so. With a higher demand, the price of the product will increase.
Keep in mind that businesses are “winning” with the creation of this new “buzz” in Downtown Napa. They have an increase in their customer base while a synergy is created bringing similar businesses and complementary businesses in one convenient location.
Property owners are “winning” with increased income and therefore, value of their real estate. Long-term real estate investors had a windfall gain of appreciation, while investors just getting into the market must increase rents in order to support the price paid on their purchase of Downtown Napa’s “new economy.”
In past articles I describe how rental income affects the value of real estate. Being a real estate investor myself, I want to maximize my ability to collect the highest amount of rent possible. This in turn, makes my business more profitable, increases the value of my real estate and my net worth.
There are several reasons why a tenant’s rent would increase. In part two I will highlight some of the reasons and provide you with a scenario we have seen today.