The $50 Rent Increase That Could Cost a Property Investor $4,300 | Ep 145

James
So here's an interesting gap. According to Oregon, right now, the amount that you are the maximum you're allowed to raise rent is nine and a half percent. Per year.

But according to the market, the amount that you're allowed to raise is zero to negative one percent. So there's Bit of a disparity there between the two. And uh it's just it's been tough.

And so what I wanna talk about is what do you do in a market mm where raising rents isn't the option. How do you help? to uh you know to to increase the revenue or at least have a throughout thriving business.

Jessi
Yeah.

James
In that time. And we're gonna talk about that on the Furlo Capital Real Estate Podcast, where we dive into the intricacies of real estate investing. And our mission is to equip people to invest wisely in both property and people so that together we can build wealth while improving housing. I'm James. This is my uh non-capped wife. Non

Jessi
-cap?

James
Yeah, no, there's no cap to you. Uh my market approved wife?

Jessi
This is just weird.

James
Sorry. It's my wife, Jessi

Jessi
Yeah, that's just weird. I don't know. I don't like kind of raising rinse.

Um yeah, that makes me a little nervous. Not raise the rents, but raise the roof. It makes me a little nervous because I'm like, oh.

So the market's not so hot, huh?

James
It's been that way for about a year now.

Jessi
Yeah. We've talked about it. So it's like

James
But what I want to talk about like so yeah so like you got flat rents, it's a thing, okay, now what? But if I'm honest, that's not the real problem when it comes to real estate investing.

Jessi
All right.

James
The real problem is vacancy, which doesn't really have a line item. Not really. I mean there's kind of there when you do account for underwriting. What do you mean by that? Well

Jessi
like

James
yes and no.

Jessi
You should factor in a certain vacancy rate to say like You know at some point there's gonna be vacancy. So I in my mind, I would have I would be much more conservative and be like, okay, and let's say that it's I don't know, 10% of the time or whatever it is, that way. If it's full more than that, then I'm good with that.

James
Yes and no. Um I think for the underwriting, you're 100% right. Because when you when you underwrite a deal, you start off with like, what's our gross potential rent? Like if everything was fully occupied, fully leased at whatever the market rate is, here's what we could earn.

Jessi
Yeah.

James
Awesome. And then you gotta deduct a little bit because you're never at the full market rate. Usually that's less true now.

So you're like, okay, there's a little bit of that factor to it. But then yes, you then subtract out there's a vacancy piece to it. And that vacancy is like physical, economic, you might have units that you're repairing, whatever.

And then you come down to your, okay, this is what my what I would call my scheduled rent is. And that's the that's that number. Um and then, no, that's not true.

Sorry. You have your gross potential rent. You then subtract out a little bit of a market factor that you're not at the map top of the market.

And then you say if everything was fully full, that would be my scheduled rent. And then you take out the vacancy factor. And then you have My actual rent, collected rent.

There's a term for it. I can't remember now. Um my net rent, I guess.

Jessi
Okay.

James
And so yeah, so you have that. And when you're underwriting a deal, you have that. But once you're actually in the mix and managing it, you actually you totally forget about, I mean, so there's accrual accounting And then there's cash accounting.

And accrual is essentially saying, here's what was always owed to me on the proper date. And assuming your tenants always pay on time. Accrual will equal cash for the most part.

Technically accrual will show the income was observed on the first and if they pay you through the fifth, but on a month-to-month, they're gonna match. But if you have a vacancy, there's that is not on a line item anywhere on your P L. It just shows up as less income.

Jessi
Yeah, I suppose, because it's not necessarily an expense.

James
Correct.

Jessi
It's just less income.

James
Correct. Yeah. Which again, when you're unwriting a deal, awesome.

Jessi
Yeah.

James
It's there. It's cool, but when you actually come to like the day-to-day, the PL piece of it, it's just not there anymore.

Jessi
Yeah.

James
And I mean

Jessi
kind of it is, but

James
What do you mean?

Jessi
Well, because you accounted for it ahead of time.

James
Uh hopefully.

Jessi
Yeah.

James
Yeah, hopefully.

Jessi
When you did the underwriting, you you did kind of pre-account for it.

James
Right. But again, there's nothing in the PL to bridge back to that.

Jessi
Sure.

James
Outside of you're saying, well, here's what I thought I was gonna get. But even then if you have run increases over time, it's just hard to

Jessi
track.

James
Yeah. Uh Yeah. I looked at some other stats. Um days on market, they've gone from twenty-six point eight up to forty-eight point three. So

Jessi
people aren't buying things that's like

James
two ish weeks of vacancy, which is like half a month's rent in a way, which you know, depending on the area that you're in, that's significant. Uh yeah, so um oh the other is average rents. They are currently down in this area forty-six dollars per bedroom year over year. Interesting. That's Corvala specifically.

Jessi
So not not only are you making not as much income from the vacancy, you're also making not as much income because rents are Dropping?

James
Yeah. Uh-huh. Oh. You make less money when people are in the units and it takes you longer to fill them, so you make less money overall. It's kind of a a double whammy.

Jessi
Yeah, that's lame.

James
Yeah.

Jessi
And that's all determined by what someone's willing to pay. Is that Like what determines the rent.

James
We're gonna talk about that. Um we're gonna talk about that. Uh sure, I'll I'll give you the uh in theory, rent is set by the most desperate landlord.

Jessi
Oh.

James
Right?

Jessi
Yeah. Cause I mean, you just would go if you have to get it full, you just would lower your price.

James
Yeah, yeah, yeah. That was like I got a 15 bedroom place and we're in that leasing season.

Jessi
Yeah.

James
And we had We filled up everything except for one unit. And and my instruction was like, let's give it one more week and then we're gonna s slash the price in half. Like I want to collect half of them on the rent for a year instead of having it sit vacant, which has I that's happened to me where I'm like, ah no, I don't want to I'm like, no no I don't care. Like I'm it's

Jessi
just collect something. Yeah.

James
Yeah. And so depending on who's looking in the market, they go, oh, bedrooms are not Whatever. $650 a room, they're $325. Awesome. Now every single other landlord has to compete against that.

Jessi
Yeah, it's like that.

James
Now if it's only one room, not a big deal, but uh that's the That's the thing I'm struggling with right now with uh I've got a seven bedroom and a five-bedroom that I just recently took over this time of year in Corvallis and they're crazy hard to rent. Yeah. this time of year for that big a stuff.

Jessi
Right.

James
And so I'm going to become a very desperate person because I'm going to talk to the owners and be like, look, like, nothing's happening. So

Jessi
Yeah, because that's that's more of a roommate situation. It's not like in an apartment.

James
Correct.

Jessi
And so there's shared spaces and people yeah. People talk about those things before just moving in.

James
Typically. Yeah.

Jessi
Yeah.

James
Yeah. So

Jessi
that is interesting.

James
Yeah, it is hard. Um and then and then you run into problems too. Like even when you're doing the online research and you're looking at what other people are out there, all you see is the asking price.

Jessi
Right.

James
Like if there's a concession that happens, you don't see it. I here's an example. Had a tenant who it was it was kind of funny.

Uh they wanted to move. They were gave us a heads up. Hey, we're looking to move.

We're like, cool. And they're like, all right, we found a spot, we're gonna move. And then it turned out like the the amount required to move in, like the deposit or whatever, was too much.

And so like, uh, it turns out we're not actually gonna move. And then it was like Four hours later, they're like, we're moving. We're like, what happened?

Well, what happened was the new person who they were gonna rent from Realized what was happening and they went, okay, we'll give you half off or whatever. I don't actually don't know what it was, but they gave some sort of concession to get them to to jump.

Jessi
Interesting.

James
And which again, from the landlord's perspective, dude, I 100% get it. Like they're like, sweet, I've got people, and then suddenly went, Oh, I don't. I'm totally willing to give up half a month's rent or whatever it was. in order to get them in instead of me risking it being another month or whatever.

So my point is that isn't on Zillow. It's not on Randometer. It's not on apartments or Craigslist or Facebook Marketplace.

Yeah. I don't see what that happened. What I see is, oh, it rented it rented from from what I can tell for that amount.

The MLS has a very similar problem.

Jessi
Yeah.

James
In theory, realtors all kind of have a handshake agreement that they go in and they write in whatever concessions happened, but not everybody does it. And so it's just it's hard to it's hard to gauge. So it's just It's I don't know like what the actual gap is. And I have seen that like when rents went flat A lot of the online tools still had it growing. And it just

Jessi
there's just a lag for

James
Yeah. Well, and they're like they're kind of forecasting out here's what we think rents are gonna do. And so for a few of them, I was like I put in those numbers and it just sat like zero calls.

I'm like, dang, like what do I do? And then and then I was like, well, forget those numbers. I lowered it, got a bunch of calls and went, yeah, all right.

And it turned out the lowering was flat, too declining. And so yeah, it's uh it's a tough market out there in the Corvallis area. Yeah, so um I'm just curious if you were to like uh Does that concept make sense like what's happening?

Like if you had to explain it to someone else?

Jessi
I think so. I mean it's like Yeah. You you have a price that you're asking someone to pay, which is posted in different places.

And then Not everybody necessarily pays that full amount the first month because there's there's deals that you make. Because it's kind of like, okay, well I don't want to lose you to sign up because that would make me lose more money over time. So I'll give you a break on the rent or you can pay the deposit later or whatever whatever it is you're doing, which then doesn't match.

the price that you had out there. So me as some other renter is like, oh wow, that was really that's really expensive. I can't pay that or whatever.

James
Yeah.

Jessi
It's like, well, actually you can, but It's hard to gauge.

James
Yeah. Okay. Yeah.

Cool. I like it. Yeah, so let's dive into a little bit more.

So there's like what we're talking about, there's the headline rent versus effective rent. It's kind of that that concept. Right.

And again, when you're talking about the occupancy, it's economic occupancy, right? So it's not just the physical part as well. It's people not paying or falling behind or whatever.

Jessi
Oh, yeah. Some Like the bodies could be in the in the unit, but you're still not making money.

James
I'm at that for sure. Yeah.

Jessi
Did is that called vacancy

James
Oh yeah. It's economic vacancy. Yeah, it could be delinquency.

The money is not there. Um bad debt sometimes. Non different names.

I prefer the economic vacancy. Yeah. Where it's just it just factors in everything, right?

I thought I would get this. Yeah. At the end of the day, here's what I actually got.

It is, and I could tell you what it was because of why. Sure. But Yeah, uh-huh, uh-huh.

So, um, but here's the problem that right now in this market specifically, it is definitely it's a buyer's market from buying standpoint, um, but then it's a renter's market. as well. Part of it is we added um just in the area, the big area, there's like 25,000 more units.

Yeah. I mean Corvallis, there's a ton. They put a ton.

I know Lemon just had a big apartment complex go up. I'm sure Albany's building. Like it's just They're all over the place.

And so uh that's supply and demand is amazing, right? Supply's up, demand inherently stays the same, slightly declining even. Yeah.

And you go, yeah, man, prices go down. That's how that works. And so if you've got um An eighteen hundred dollar place , which would be like a two-bedroom spot in Corvallis.

Jessi
Okay.

James
Yeah, it's a two-bed. And let's say you're like, okay, you know what, we gotta try to push the rents because we can According to Corvallis, like we can go nine and a half percent. You go, Bo, you know, we'll be cool about it.

We'll just do uh, I don't know, two and a half percent. You 'll raise it uh 50 bucks. Okay.

That's where the title comes from. Your tenant decides to leave. Wah wah.

Because they can. Because there's just other options out there. And and they can see what the market is actually, what it's actually worth.

And as we talked about, it's 48 days to find someone new on average. And so that right there is $2,900. Just gone.

And of course, you're gonna maybe clean the carpet. You might do some painting, some cleaning, some sort of small fixes.

Jessi
More than that.

James
You know, it's gonna be 1400 bucks at the end of the day. Carpet alone is gonna be $400 to do it. Um, just to clean it.

Yeah. So you mean that's all that needs. So all in, like your turn is roughly like $4,300.

Right? So you would have gained $600 a year. From your $50 price increase.

And so your break-even is seven years.

Jessi
Oh. Yeah, that's that doesn't seem worth it.

James
Yeah. And the worst part is you're probably going to end up re-renting it at $1,800 anyways.

Jessi
Oh, that's where that's where the market's at.

James
Uh-huh. Uh-huh.

Jessi
Huh. So even though Oregon allows you to increase rent by nine, nine and a half.

James
Yeah.

Jessi
Nine percent, whatever. You you have to watch the market and figure out if that's actually sustainable or not.

James
Correct.

Jessi
Because if a if a tenant isn't willing to pay that increase and they just go somewhere else, you actually have way more Dang, seven years to break even.

James
In that example. I mean, I remember there were times when we got into it. It was awesome because we would post something for rent. And we had like 12 applicants within a day or two.

Jessi
Yeah.

James
Like sweet. And um And then part of there is like there's just nowhere else for us to go. And honestly, like for these two big houses, if they were one or two bedrooms, I I would get them rented. Like it'd be fine.

Jessi
Yeah, it's more complicated.

James
Those are

Jessi
multiple.

James
The problem is not that there isn't demand for it. There just isn't now. The problem is that all the demand was in April.

Jessi
Right. The timing is off.

James
It's just hard. And so it's it's difficult. I'm yeah, it's kind of interesting. I'm learning that for myself, I actually prefer the smaller units to try to rent. They're just easier.

Jessi
Yeah.

James
I'd rather have a whole bunch more people than just one big one.

Jessi
Yeah

James
But that's something I'm I'm learning. Um

Jessi
so if you don't get it rented Would you just rent some of the rooms or

James
that's a good question. I don't know. Um Well, I can't do a rent-by-the-room thing. Because that would require me to like partially furnish the entire place. Like all the common areas I'd have to suddenly furnish.

Jessi
Oh.

James
Which is and expense. And once you're kind of in that game, it's hard to get out of that game because unless you get everyone to finish at the exact same time.

Jessi
Sure.

James
Which is difficult to do. Um, I don't know. I think at the end of the day, there is a price point where someone will jump. And you just I it's a question of how fast do you want to find it. You know, um you can get extreme, slash it in half, and I guarantee you you'll find but that might be a problematic because they might be like, well, what's wrong with the place?

Jessi
Right.

James
And you have to kind of you have to try to explain. Look, I 'm serious, it's vacant Or not. There will be another round in January.

Jessi
Yeah. That's true.

James
That's when

Jessi
new new terms begins, new stones come in.

James
I've

Jessi
shovel around.

James
I'm currently I'm trying I'm trying one non-standard deal with one of them. I don't know what I'm gonna do with the other. But yeah, no, it's uh it is super hard.

So here's the other part of it, right? So If you get that person to stay, that was $4,300 you didn't spend, right? Or another way to think of it is your rent went up by $358.

versus doing the standard turnover thing, which is twenty percent of your rent.

Jessi
Yeah.

James
You know, and so Um and the cool part about it was nobody had to negotiate it. The Oregon cap didn't matter because you actually didn't do it. And I think When you're in a market that is flat like this, you really gotta change your mindset and say retention is growth. That's the name of the game is retention. I I was reading some stuff and and they had a whole bunch of other ideas for how to how to improve it. You know, one of them was like, oh, especially for if you're a bigger one, they're like, figure out a way to use AI and streamline your operations and you can cut staff and Therefore, you know, which I'm like, okay, for a property management company, sure, but like for individual owners, like I don't

Jessi
know how that works.

James
And um And then there were some other things like renegotiate your insurance, which is like genuinely true and stuff. But mathematically, like Like retention, reducing turnovers, that's the big one.

Jessi
Huh.

James
You know, it's like for your insurance, you're like, hey, I negotiated and I was able to like, you know, I don't know. If you're amazing at it, say like 500 bucks a year, maybe maybe. You know, it depends on the size of the property and all that stuff.

Yeah. But Like relatively speaking, because I think like what for a single family home, your insurance is gonna be it's roughly a hundred bucks a month. And so you're talking you're only talking twelve hundred dollars.

Like how much are you really gonna squeeze out of savings? Whereas again in Corvallis, if it's a if it's a single family home, you're actually renting it for like 2200 bucks.

Jessi
Right.

James
And so you're just like, I Like I you can't just someone not losing out on that 48 days, right? That's the other if if vacancies were like, ah, it's only two weeks, but all right, yeah, push the button, you know, push the envelope, sure, let's go for it. But it's not It's a month and a half.

Jessi
It's really long.

James
And so you're just like, ugh. And so yeah, it's just it's hard. So What's interesting, uh, what's hard about this one is myself as a spreadsheet samurai, uh, I love them.

I tend to, when I do the underwriting, I'm like, yeah, like Must push the rents, we're gonna have vacancy, it's fine. But it's re like but that vacancy math like that percentage has to creep up more than what I would normally put in there. And once you do that, you're like, uh, okay.

You actually like the goal is to be less aggressive on the rent and and keep people, um, which is hard. Uh let's see. Also, like I I it's funny, I actually I earn more money whenever there's a turnover as a property manager.

Jessi
And so

James
there's a there's a lease, there's a turnover fee that I charge. And if we're doing any repairs or work and and if I do that work, I charge for that as well. And so for me, like turnovers are great.

I want one every year. But I don't. I don't have that kind of energy. But uh But like that's the that's the like there's that weird tension, which that's part of the advantage of me being an owner myself.

I'm like, no, no, I don't yeah, I don't care.

Jessi
You get the balance.

James
Retention is great.

Jessi
Yeah.

James
It's all good.

Jessi
Yeah.

James
And so um So yeah, anyways. That's it. And again, we already talked about this a little bit.

I I brought it up earlier where I was like, your rent is set by the most desperate. landlord who's out there and so if there's s someone else who's like I just need the cash, I don't have a choice and so they drop the rent by two hundred dollars. That like the market sees that.

Jessi
Yep. And

James
like, okay. And um, so it's really hard. And so you don't want to play in that game.

And the way you don't is by not having a vacancy to begin with. And so um there's a little levers that you can do. Like you can say, especially in Corvallis, you could have someone go month to month and say, Hey, it's all good.

I'm gonna charge you a little bit more, but you get the flexibility of moving out whenever you want, as long as you're You know, within reason on what you're gonna charge. I mean, we're talking like twenty, twenty five dollars more type of thing. Not a ton, but it gets it.

Obviously, there's the whole pets thing, um, allowing pets, you can earn An extra forty to fifty bucks a month. Um seasonality is a it's a thing for sure. And that's the thing that I'm experiencing right now.

Like October, November, not great. Neither February March.

Jessi
Yeah.

James
Like those are really.

Jessi
Huh.

James
Yeah. Um I also just think getting your turnovers timed really well is important. And um But yeah, anyways, uh that's uh that's my that's my observation for the current market, and that's our the name of the game that we're trying to pursue is okay, how do we reduce turnovers and the big piece of it is not trying to really be super aggressive and push the rents. And you know, doing all the other stuff when they they call away respond.

Jessi
Yeah.

James
You know, that kind of stuff.

Jessi
Keeping keeping tenants happy.

James
Yes, yes. It's uh it's a good strategy. But again, like if rents were growing, you know Sure.

Like they were a few years ago. You're like, no, I'm gonna raise the rent. I'm unapologetic about it because honestly, if you move out, I can go find someone in a couple of weeks who's going to pay even more.

Jessi
Yeah.

James
So Oh well. You know. And that that was the attitude like two or three years ago.

Jessi
Right.

James
And now it's like, no, no, no, okay, we got it.

Jessi
It kind of reminds me of this jujitsu principle that you you like shared a while ago when you were doing when you were doing that. That was like they had these super advanced, like crazy moves.

James
Yeah, yeah.

Jessi
You know, and and this black belt teacher was kind of teaching you how to how to defend and how to do it do this and that. And people were asking, like, well how do you how do you get out of something like that? And he goes, don't get into it.

It's like, yeah. Oh, okay. All right.

So it's like, well, yeah, well, how do you deal with vacancies and how do you and it's like, just don't allow them to happen. Like try to keep people in there and

James
Yeah. He he talked about in terms of a a late stage defense versus early stage defense and like The late stage is how do I do a how do I get my vacant how do I do my turn really effectively?

Jessi
Yeah.

James
And how do I attract a lot of leads to to see my posting? And it's like You can do it, but you gotta like you gotta be on your A game and you gotta do really well and like and it's really hard to do it well. Whereas if you have the early stage defense, which is no, we treat our tenants right and we just don't have the turnover at all Then it's like, oh yeah, well this is easy to to keep them on.

Yeah. Still work. It's not like it doesn't happen, but man, it's a whole lot easier.

Yeah, I know you're right. That was a fun of that. That was a that was a memorable, life-changing event.

Um yeah, so one takeaway is um Again, flat markets don't necessarily um they don't create bad people, but they ex are bad operators. They just expose them from what they're doing. And again, vacancy like That's the bill that it doesn't show up on the PL.

It does show up in the underwriting, but not on the PL.

Jessi
Yeah. Yeah, it's not a line item. Just

James
Yeah.

Jessi
It's just not income.

James
Just not income. So sad. Yeah.

Uh yeah, it is. Alright, there you go. That's what I got.

I'm talking about. It's kind of a Tough market. But reduce vacancies.

That's the focus. That's the drum that I beat. And if you are interested in doing that and working with us, um, we'd love to talk to you about it.

So you can visit us online at Furlo. com. You'll see links for property management and other stuff as well.

So with that, thanks for listening. Have a great day.