How Rent Prices Are Determined

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How Rent Prices Are Determined

aptsherpa · Aug 27, 2007

No matter how good a deal you have on your rent, eventually you’ll hear about someone who has it better. And then just when you start to feel bad for yourself, you’ll meet someone who’s paying an arm and a leg for a place much smaller than yours. When you think about the wide range of rents in your city, you’ll start to wonder –- how do landlords figure out how much to charge?

Unless an apartment is rent-controlled or rent-stabilized, a landlord needs to set rental rates high enough to cover the apartment’s expenses. And there are a lot of expenses. Many landlords have mortgages on the properties they rent out. If the building employs a Super, building rents must cover the salary. Supers who live in the building often receive free or deeply discounted rent — another cost. Add building repairs, utility bills, taxes, common area amenities, and insurance, and you’ll see a significant amount of money that the landlord needs just to break even. But we all know that most landlords aren’t just breaking even. Once the basic costs are covered, landlords need to figure out the greatest amount of rent they can charge and still ensure that tenants are willing to rent the apartment.

This magic number is essentially the market rate, and it’s always changing. Landlords stay on top of the market rate in many of the same ways tenants do. We spoke to landlords of both large and small buildings who admitted to doing regular research about what others were charging by looking at newspaper rental listings, checking internet ads, and calling real-estate agents. But this research is only useful if it’s targeted. Landlords focus their searches to apartment buildings in the same neighborhood, with the same number of bedrooms, similar square footage and amenities. If you think this sounds like a lot of work, you’re right. It’s complicated enough for someone to have designed software to help landlords with rent calculations. This is one reason that landlords with smaller properties don’t always do as much thorough research as landlords of larger buildings. Michael, a landlord with four units in his Brooklyn brownstone says that it’s not worth his time to follow the latest rental trends in his neighborhood. “I have a real job. It’s just not worth it to figure out whether I can charge my tenants a little bit more.”

Landlords with more units are less likely to have day jobs, often making their living exclusively from the rental market. For these landlords, it makes sense to follow market trends more carefully. Marla and her husband own several five- and six-story walk-ups in New York’s trendy East Village neighborhood, each with 20 to 30 units. She says that the most important factor determining her rental rate is location. “I’m lucky enough to own buildings in a neighborhood where everyone wants to live. My tenants are less concerned with whether they have a dishwasher than how close they are to the subway.” Even having a building in a desirable neighborhood won’t allow her to charge whatever she wants; she admits to closely watching what nearby walk-up buildings are charging and making sure that her rent stays in the same range.

Landlords with many units have an advantage over smaller building owners — they can use newly vacant apartments as test sites to see how well a rent hike will be received by potential tenants. If most of the two bedrooms in a complex rent for $1800 a month, the landlord can test how well a rent hike to $1950 will be received by setting that price for a vacant unit and seeing whether there is any difficulty filling it. If the apartment is easily filled, the other two-bedroom tenants may see a similar increase at the end of their leases. On the other hand, if the $1950 monthly rent scares off prospective tenants, the landlord knows to try for a smaller increase next time. To a tenant, it may seem that the landlord takes every opportunity he can to raise the rent. To Marla, though, it’s sound business practice. “People seem to forget that our expenses go up too. I also have a lot of rent-stabilized units and it’s harder to cover my costs with those.”

Rent-controlled and rent-stabilized apartments are more precious than gold to thrifty tenants. They can be hard to find, so people go to great lengths not to give them up. Rent control and rent stabilization are government initiatives designed to maintain affordable housing, with laws that vary depending on the state. Rent stabilization and control laws generally affect older apartment buildings and the tenants who occupied them at the time these laws were passed. These laws are one of the reasons that tenants may be paying wildly different amounts for the exact same apartment in the same building. Rent control applies to the leases of particular tenants while rent stabilization applies to particular apartments, regardless of who occupies them. A rent-controlled apartment is essentially impossible to obtain because the rent-controlled status has been grandfathered into a lease held by the particular tenant. These tenants have usually been in their apartments for a considerable amount of time. When they finally terminate their leases, the apartment rent usually returns to market value.

New tenants can actually obtain rent-stabilized apartments. Tenants in rent-stabilized apartments are protected against rent hikes of more than a certain percentage each year. Even when a rent-stabilized tenant ends his lease, the landlord still has to abide by rent stabilization laws and limit the amount the rent can be increased for new tenants. However, rent stabilization typically expires after the total apartment rent reaches a certain threshold (you can check your state or city laws for the rent stabilization threshold where you live.) In both rent-stabilized and controlled apartments however, tenants pay less than they would in a market rate apartment.

When the landlord decides to re-tile the lobby, fix the front stoop, or install a new sprinkler system, new tenants pay disproportionately more than the old tenants who have stabilized or controlled rents. Landlords of older buildings count on the rents of newer tenants (and regular increases in their rents) to help cover costs for the entire building. Of course, the rent calculations that many landlords perform are not an exact science. The fact that landlords set their rents in a range rather than to an exact number tells tenants that there may be more room for rent negotiation than we think.

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