The San Francisco Rent Board sets price controls on residential housing effectively acting as a price ceiling, except when an apartment becomes vacant. Then the owner/manager can bring rents up to market rate. If the unit was occupied for 10 or even 20 years, eventual increases to the prevailing market rate represents a spike in cash flow.
In fact when a building with long standing tenants comes up for sale it’s a great selling point. It’s not hard to see future value when you are looking at a few units renting for $350 that would easily rent in today’s market for $1,500.
Not Everything Is Rent Controlled
In San Francisco, limits to rent increases are mandated and administered by the Rent Board with some exceptions:
1. New Construction: Mandated by state law, all building constructed after June of 1979 are exempted
2. Subsidized Housing: such as HUD housing projects.
3. Dorms, monastery’s and nunnery’s
4. Residential Hotels: If you have less than 28 days of continuous tenancy.
How it Works
Base Rent: A landlord can increase the tenant’s base rent by an annual allowable increase. This year its 2.2%. So, if a tenants rent was $1000, the most you can increase in 2009 is $22. Next year the rent board will declare the maximum allowable increase for 2010. There are other types of rent increases such as capital improvements, increased operating and maintenance expenses and utility costs, but they need rent board approval.
Managing Declining Rents & GRM
The trick now is to respect the trend, keep the unit occupied and preserve equity.
Here’s the problem: You have a vacancy or a recent tenant wants a rent reduction and the unit rents for $1500. But similar units are now going for $1400. Its bad enough to have to forgo $100 a month, but if lower your base rent you may be paying for that long after the market has recovered, perhaps even 10 or 20 years.
Here’s why: lets assume your base rent was $1500 and it becomes clear that you have to reduce it by $100. At $1400 (assuming this years maximum annual increase of 2.2%) it might take you three years just to get back to $1500. One down year affects the entire future income stream if you use a lower the base rent to accommodate new market realities.
Keeping the higher base rent in tough times
1. Attractive Gifts: Keep the rent at $1500, but offer gift certificates or other amenities. A rent reduction to $1400 is a $1200 annual loss. Maybe an offer of a new Dell notepad ($350) is attractive enough. If this worked, you would have kept your base rent at $1500 and saved $ 850 this year. In forward years, rent board increases would be based on $1500 and not $1400.
2. Skip a Month: Offer one month free rent. Tenants are open to this and it allows you to preserve your $1500 base rent. Never make it the first months rent, since you may find yourself with a tenant that doesn’t pay in the second month either and now you have a squatter.
3. Improvements: A really great idea is to offer amenities that will increase the value of the unit. Consider amenities tenants can’t take with them such as: stackable washer/dryers, microwaves or dishwashers. Tenants really do like the added convenience and it adds value to the unit. A good win-win choice.
4. Increase Market Depth: Consider pets. You can reduce risk by asking for a pet deposit in addition to the security deposit. Be sure not to exceed 2 x rent for unfurnished or 3 x rent for furnished rooms rules for San Francisco.
5. Section 8: Increase your applicant base by considering Section 8 . .
6. Advertise: Maximize your marketing presence by using Craigs List and an internet listing company such as apartments.com
7. Hire a property management company: If it saved you just one month, because of their leasing expertise or visibility, you would be ahead of the game.
** A note to home buyers: Preserving the base rent for future rent increases also skews the GRM. It’s important to compare the rent roll to actual rental income reported, when buying or representing buyers.