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by | 12, Feb 2022

Stop Price Gouging… Here’s How.

This week we answer a difficult question, but the answer is important. How do you raise rents fairly?

What is the difference between raising the rent and price gouging? It’s important you reflect on this question with your morals and ethics. These are not just numbers and figures that are reoccurring every month, this is dealing with people’s homes. Listen in as we discuss how to fairly adjust rent to match market value.

We will talk about these things…and more in another episode of Multifamily Investing Made Simple, In Under 10 Minutes.

Tweetable Quotes:

“Time is a really nice luxury to have in a business model.”  – Anthony Vicino

“We provide something that somebody wants more than the money that we’re asking them for in return .” – Dan Krueger

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** Transcripts

Anthony Vicino: [00:00:00]  Hello and welcome to multifamily investing made simple podcast. It’s all about taking the complexity out of real estate investing so that you can take action today. I’m your host, Anthony Vicino of Invictus Capital, joined by Dan. The words are hard, Kruger.

Dan Krueger: [00:00:15] Hmm. Yes, I got an ordering recently. Hmm.

Anthony Vicino: [00:00:19] Tell me what advice I’ve had mine for over a year now. Tell me about your experience so far.

Dan Krueger: [00:00:23] So I was looking for just the sleep data tracking stuff. And so I’ve had this for a month and a half, maybe two months. My sleep score this week is bad. Awful? It’s bad. Really bad.

Anthony Vicino: [00:00:35] That’s all the scores, guys.

Anthony Vicino: [00:00:36] It’s really bad with the data. It’s, uh, my rings mad. Anthony’s mad. Yeah, my brain’s a little slow from lack of sleep. It’s been a busy week and sleep has not been that great. And so if this episode is a little slower than

Anthony Vicino: [00:00:51] Usual, this is going to be a good one. That’s why, no, this episode is an 10-minute episode, so it’s not going to be slower than usual. It’s going to be a quick hitter. It’s gonna be,

Dan Krueger: [00:00:58] And it’s going to take a nap.

Anthony Vicino: [00:00:59] And luckily for you, the topic is actually really easy, one that we can talk about without sleep. Like we don’t need sleep for this one. Ok, so today’s topic is what? Oh man, now I had the brainfart. Ok, today’s episode is raising rents versus price gouging. How do you raise rents fairly? That’s a good question. That’s a good question. I think like what is the difference between raising rents and like going in and doing value add and making improvements to the property? And then, you know, increasing the rent, sometimes 10, 20 percent. How is that different than price gouging, like just going and, you know, raising 10 20 percent? Like, at what point is it price gouging? Is there? Is there a percentage where we’re like, we start to feel bad about it? I don’t know. Let’s unpack it. Let’s unpack that today.

Dan Krueger: [00:01:48] Yeah, that’s a really great question, because I’ve noticed while talking to investors over the years, people who are new to this kind of business model our kind of value-add B and C class asset game plan that we like. Here is something that could be initially perceived as a kind of price gouging. Like it sounds like we’re just going to buy an apartment and then jack the rents up and make a bunch of money like, I think that’s what people hear from the headline of We do value-add, right? So I think, you know, in my mind, how to do value-add without being a price gouging. Well, first off, price gouging. For me, the definition of that is a substantial increase in rent above inflation that is not coupled with some kind of value proposition from whoever owns a place, right? So if you just jack the rent up on somebody 20 percent and don’t do anything to justify that increase, then I would throw that into price gouging. So personally, I think that in order to do a good value-add where you’re raising rents and you’re doing it in a moral and ethical way, you want to provide something to the resident that’s worth more to them than the money that you’re asking for them to give you in return, right? So you can kind of dive into what some of those might look like, but that’s how I look at what we do. We provide something that somebody wants more than they want the money that we’re asking them for in return for it. And it’s reasonable. It’s not so.

Anthony Vicino: [00:03:22] So here’s how I look at it. Maybe slightly differently is I look at it as what is the value relative to the market? So if I’m going in, we’re buying a building. And right now the rents are two hundred dollars below market and you go in there and the units are the same quality as like the brand new building across the street, like they are market standard units and they have great amenities and all the things that like in a normal environment, this should be getting the same amount of rent as the unit building across the street without making any improvements, then that tenant has been paying below-market rates, right? And so for me, it’s not price gouging to bring it back up into alignment with market. Now that’s a very rare scenario because it’s very unlikely that the building is just at the same par as the rest of the market. And yet the rents are just like trailing. That usually doesn’t happen. Usually, there’s some delta,like there’s some gap in the quality of the product that is justifying it falling behind market.

Anthony Vicino: [00:04:28] And so then what we do is we go and we try to improve the units to bring them back up to market, and that then justifies bringing the rent up as well. But the trick here, I think, is to be aware of the fact that we’re working with families, our residents are people right, and regardless of whether or not they’re in a unit that should, by all metrics, rent for $200 more because that’s what the market is demanding. You can’t just go in there and do that to them because there are humans, that’s their home. So you have to find a way to get it back up to market, in a time frame that makes sense for that resident that doesn’t just put them into economic hardship, and I think that’s where like the slumlords really come in is like they buy a building, they go in there from day one and just like two hundred dollars across the board, everybody’s rent just hikes up. Yeah. And it’s like, that doesn’t sit well with anybody.

Dan Krueger: [00:05:19] Yeah, no. I think that’s a good kind of case study to look at because that has happened over the years where we’ve come across a property that we’ve acquired and somebody is in there just way in the market. And typically those people have been in that unit for a very long time, which is why they’re so far in the market. And so there is this amount of work to do on that unit to really get it to where it needs to be. But there’s still paying, even in a really out-of-date unit, they’re still well under what the market rate is. So we do in those instances is that person probably doesn’t want to leave anytime soon because they’ve been there for so long. So as we’re working on the rest of the building, what we want to do is make a proposition to that person and say, Hey, do you want to move to this brand new renovated unit? Still be in the same building that you love, but you get all these new appliances, you get this new carpet, it’s brand new. And why don’t we move you up there and you just have to pay the market rate to be in there, but you get to stay in the same place and have all new stuff that usually goes over pretty well.

Dan Krueger: [00:06:12] And then when they move into that new unit, you go fix up their unit, bring it up to market rent. The alternative is that they don’t want to leave their unit. They really want to stay there. All you have to do is increase the rent a little bit over inflation. So that way, over time, they get closer and closer and closer to market rents. And you can decide at what point did it make sense to kind of settle there? Depending on where inflation’s at, I don’t know when you’re listening to this. It might be in the future when inflation is two percent. Right now, it’s really high. So it’s kind of up in the air as to what inflation is, quote-unquote. But you know, if you look at your operating expenses, you should be able to tell your over year how much you’re spending on your general operating expenses. So your inflation for your property should be pretty clear. So just take that out a few points for a profit. Add a couple more points to get them back up to up to speed, and you should still have a rent increase that’s appropriate given the market and the tenant should understand this as well. So have a conversation with them, you know, just explain what’s going on.

Anthony Vicino: [00:07:10] This is generally why I like having a really long time frame or a time horizon for executing a business plan because it gives you a lot of flexibility then to go in there and work with residents and say, Hey, we’re planning on holding this asset for five, 10, 15, 20 years, so we don’t need to go in there and jack up your rent in year one or even year two. Like we can do this slowly over the next three or four or five years. So like time is a really nice luxury to have in a business model. And I know that not all operators operate that way because their business model might be like, you know, get in there, maximize that IRR, get it done, get it out. And that’s fine. There’s nothing wrong with that. It’s just, you know, different strokes, different folks. For me, I think it’s really cool to have that extended timeline because then you don’t ever feel rushed and you don’t have to put somebody into economic hardship like overnight, which I don’t think I’ve ever done it, but I have to imagine it wouldn’t feel very good.

Dan Krueger: [00:08:04] Yeah, no, it’s definitely not. And I’ve had this actually on my first property. There was an individual that didn’t have any desire to move out, but we still wanted to try to get rent up because he was substantially below. This is kind of one of the exact scenarios I was describing a second ago and what we did for him as we were able to do some improvements while it was in the unit. I can’t do everything we would usually do, but we could still do some stuff that would add value to him and justify us starting to bump his rent up at a reasonable pace. So we’re not going to take him immediately up to market value. But when you’re delivering the news that Rent’s going to be coming, Rent’s going to be going up. You know, if you’re bringing, you know, brand new appliances in with you, when you deliver that news, it’s going to be received better, right? And you can ask the tenant as well what they want, right? Maybe they want an extra AC unit. Maybe they want new appliances. Maybe there’s a bedroom that needs re-carpeting. There’s some stuff you can do in the bathroom. There are a lot of improvements that you can do for a resident. If they don’t want to move out like you can and do a full paint job on the unit. But you can still add value, right? That’s the point. It’s like you want to find some ways to make their life better while you’re asking them to accept a rent increase.

Anthony Vicino: [00:09:19] So, so that is today’s episode. Hopefully, it was intriguing. Hopefully it

Dan Krueger: [00:09:23] Was entertaining. You sound underwhelmed by.

Anthony Vicino: [00:09:26] Well, no, no. I thought this was actually an interesting episode. I will leave it to our audience to decide for themselves whether they thought it was value-packed. If it is, then go to leave a review on iTunes. Is this just one of those topics that it’s, you know when it comes to rent growth versus price gouging? And like, it’s a spectrum, it’s a conversation, and a lot of people fall on one side, some people fall on the other side. So it’s just one of those that I think it’s a valuable conversation to have with at large the investment community,

Dan Krueger: [00:09:56] Especially for the newbies, because I think it’s it’s not clear, necessarily. How what we’re doing is different than what some someone are doing, I think it’s really kind of a good idea to really draw a distinct line between here’s the moral and ethical way to run a good business, improve a neighborhood in a building and make money. And then here’s how you can just be a dick about it.

Anthony Vicino: [00:10:15] And let me know all about that one. Anyhoo, I just see our guys and gals that’s going to do it for us, we appreciate you as always. Thank you. Thank you. Thank you. Thank you for taking a little bit of time out of your day to join us. And we can’t wait. Absolutely can’t wait to see in the next episode, so. I guess we’ll see you there. Yeah. All right. Goodbye.

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