Why raise the rent? (Part 3)
In part 1 we discussed market value of leasable space and how demand plays a large role in determining rent. Part 2 highlighted a scenario we may see today where a landlord doubles the rent of a tenant. In this post we will examine some of the more subjective and objective reasons whether it is right or wrong for a landlord to raise the rent.
When asked, “Why do landlords raise the rent?” Some of you may say, “Because they can!” I know several landlords who have owned their commercial property for many years and are charging significantly below market rent. It seems they have a sense of responsibility to their tenant’s success taking the moral position, “They don’t make much money; if I raised their rent they would probably go out of business.” Which is admirable in many regard. These owners usually find themselves in a positive ownership position spanning decades, with little or no mortgage and low property taxes.
Is this a prudent business model for an investment property owner? It may be for this individual as there are advantages from a sense of philanthropy and less management headaches, to the security of having a solid long-term relationship with a tenant in a property that “runs itself.”
On the opposite side of the spectrum you may have a property that is owned by an investment company or REIT. Their business model is return-on-investment as their first priority. This by far is not a negative position as it creates much of the income and wealth we see today and may be a major factor in your retirement income. Plus, many of these types of owners operate quality properties that secure many of the tenants we enjoy patronizing.
We see businesses fail every day. Whether you are purchasing a new home and are in a position to keep your prior home and rent it out or are an investment company with billions of dollars in real estate in your portfolio you are running a business. It is important to create a plan and a strategy for the future of your holdings so not to fail. Of course you would want to at least break even, but who would not want to be compensated for their time, efforts and good decisions?
A prudent business person would develop a business model and strategy to position their business in such a way as to grow it exponentially. Who would not want their clothing shop, bakery or restaurant to do so well that they are providing more quality choices to their customers at a good value, adding additional locations, providing jobs while substantially increasing their self-worth?
In the same way a real estate investor who is adept in spotting an opportunity and seizing it can take a “tired” property, improve it and reposition it in the marketplace. This may look like an “evil and greedy” real estate investor raising rents and forcing long-term tenants to move out, but this is not the case. It is business.