Calculating rent for renewing tenants is the most challenging, and least understood, aspect of pricing.
Most BTR operators charge the same rent to new and existing tenants for the same apartment. While this sounds logical at first, there are 3 reasons not to adopt this approach:
- In most cases, existing tenants aren’t going to move out for an extra couple of per cent, even in a weak rental market. They don’t want the hassle or cost of moving. And they probably like the apartment and community. This is a reason you can charge slightly more to existing tenants. However, you can only do this to an extent. If you push the envelope too far it can damage your reputation, especially in a BTR community where the tenants are all in contact with one another. You don’t want to be suffering reputational issues at any time, especially in a weak rental market.
- If market rents have fallen, you may need to reduce the asking rent for new tenants. In this case, many existing tenants will happily continue to pay their current rent.
- Existing tenants won’t tolerate a large increase in rent, even in a strong market. You might be able to increase rents for new tenants by 15%. However, If you pass this 15% increase on to existing tenants, the chances are they will leave. Then you will have the effort and cost of finding a new tenant, including a vacancy period. You might be better off spreading the increase over 2-3 years to keep the tenant.
Once you recognise the benefit of charging different rents to renewing tenants, the next consideration is, where is the tipping point?
Price Wizard has collected thousands of data points on this very subject. This analysis helps us identify the probability that each tenant will renew their lease, depending on the rent increase and other factors.
The first thing you will notice in the above chart is the steepness of the curve. The steep curve shows that a small change in price has a large impact on rental income. Getting the price wrong by only 5% can have a much larger impact on revenue. Often, Price Wizard will recommend that our clients moderate rent increases for renewing clients, especially when rents for new tenants have increased sharply and/or when there are forecast vacancies. Fortunately we have excellent data to help us hit the sweet spot.
I can’t stress enough the importance of getting pricing right for lease renewals. Despite the importance, most operators give it even less attention than pricing for new tenants.
