Recently, we found ourselves on the receiving end of a proposed 13.7% increase in our rent. I blinked a couple of times when the notice arrived. Did they really think that a financially secure couple would blindly pay such a gigantic rent increase?
Turns out, they did.
And here’s the story of how we didn’t.
It all began on a breezy sixty days before the end of our lease term. The renewal notice arrived via email and I didn’t think much of it at the time. We liked our apartment. No longer paying NYC city taxes has been great for us and with skyline views of Manhattan, it never felt like we were far away from the City. I was 100% confident that we’d be renewing.
But when I looked at the numbers, I immediately recognized the 13.7% jump in rent.
When we first moved into the building, they offered a concession of one month of free rent, a common tactic around the NYC metro area. Our building was brand new and in area with lots of available apartments, so the one month of free rent is meant to reel you in with the allure of getting to skip a month of bill payments! After the free month, you’re supposed to continue paying monthly rent at the “normal” rate.
The renewal notice said that our monthly rent would be increasing by about 5%. But since you’re typically locked into these contracts for at least a year, I think it makes more sense to look at the annual value of the contract.
For example, imagine an apartment with a monthly rent of $3,000 but where they give you a free month. Total cost of the contract over a year is $33,000 ($3,000 × 12 – $3,000). If the landlord raises the monthly rent by 5%, you’re now paying $3,150 a month but you’re paying $37,800 a year, for a total annual increase of 11.45% over the cost of the previous annual contract of $33,000.
But I can hear the real estate agents out there saying (as did our landlord), that you’re not supposed to take the free month of rent into consideration. It’s just a concession.
That’s ridiculous. As the consumer paying the rent, I don’t care how you as the landlord choose to structure the deal. You could have given me 11 months of free rent and charged me $33,000 during the final month. All I care about is how much I’m paying over the lifetime of the contract. The rest is window dressing.
It took rounds and rounds of email exchanges for the management company to even agree with me that the annual rent was going up 13.7%. Once they did, they couldn’t justify the increase other than to point to other properties in the area charging similar rent. I later found out that these properties were also managed by them, thus making the competitive nature of the market rendered irrelevant based on their metrics. Based on my own research, I offered to accept a 9% increase in rent as that seemed to put us in line with the market.
In the end, they refused to budge. And we refused to pay the rent increase. We moved to a new building, which is working out to be significantly cheaper, even if you factor in the costs of moving. They had an empty apartment for at least six weeks, meaning they lost more money than if they had simply agreed to the 9% increase that I proposed.
Tips for negotiating your rent
The experience taught me a lot about working with management companies in the NYC metro area. Here’s some of the things I learned.
Renting by algorithm
If your landlord is a gigantic management company, the most important lesson to understand is that your rent is being set by an algorithm. The employees of the management company have very little flexibility to deviate from the computer. Throughout most of my time in NYC, I’ve avoided dealing with large management companies and rented from private landlords. When you’re dealing with a person, they’re susceptible to logic. The computer says no.
To maximize your ability to negotiate with a computer, you need to understand how the algorithm works and use its weaknesses to your advantage.
Renew during the winter months
The easiest way to get ahead of the computer is to time your lease renewal so that it happens during the winter months. Algorithms setting rent look at factors such as the foot traffic and – I’m not making this up – the weather forecast. During the winter, there are less apartments available for rent and less people looking for apartments. That means demand is down, so the price follows suit.
If your apartment has an outdoor space, it’s not a great selling point for the broker to stand with you outside in 30-degree weather talking about how much fun you’ll be having in June. Contrast this with people who have a lease renewal on June 1st and are looking at new apartments in May looking forward to a full summer.
After we left our apartment, I checked its status on the building website daily to see how long it stayed on the market. Amazingly, the price of the rent changed nearly every day and fluctuated more than 5% up and down from the original asking price, meaning I saw total swings of more than 10% of the price.
Setting up your lease to renew in the winter isn’t as easy as you think. Landlords are wise to this too, so they’ll be fighting you on the other end. If you’re already on an annual cycle, my suggestion is to start nudging your lease renewal date toward winter so that you eventually end up with a lease that expires during the winter months. If a large annual bonus is a big part of your compensation, I’d also work to make sure that your lease renews about a month after the bonus is paid. You’re most likely to leave a job (and therefore, possibly a city or apartment) after that bonus is paid.
Long-term thinking vs short-term thinking
If you’re asking “What’s my monthly rent?”, you’re asking the wrong question. Rent is not the same as your electric bill. Rent is an annual contract. The landlord can describe it however they want but ultimately you’re responsible for paying the amount due pursuant to the contract, so start thinking about rent over the lifetime of the contract. It’s a subtle shift but you’re looking to build wealth of hundreds of thousands of dollars, right? Take the step to thinking long term about your rent contract.
The same is true for rent increases. The difference between a 3% or 5% increase might not seem like a lot if you’re viewing it narrowly in terms of the monthly increase. But your current rent sets your expectations for your future rent. A lawyer that pays $2,500 for rent today will be paying $2,898 in five years at an annual increase of 3%. The same lawyer would be paying $3,190 if they agreed to annual increases of 5%. I imagine you could think of a lot of things to do with an extra $3,504 each year.
Financial security gives you ultimate control
Our management company couldn’t seem to understand why we didn’t just accept the increase. We recently had a baby. We were going to have to move. It was only 5% more per month. Surely we’d make the easy choice and just stay put.
Most landlords are dealing with people who are just getting by on their monthly paychecks. They don’t have the option to move. They can’t afford the moving costs. Putting down the first month’s rent and a security deposit at a new place is too much of a hassle.
But if you’re built up your savings, you are 100% immune to such arguments. You can do the math, factor in the cost and hassle of moving, and make a rational decision. You’ll notice in my story above that we didn’t negotiate. We offered a 9% increase and never budged. While they didn’t accept it, there wasn’t a moment’s hesitation on our part once we decided to begin the moving process.
As a current resident, you have more leverage than you think
The downside of already living in an apartment when you’re negotiating a rent increase is that you have transactional costs if you want to leave. Hiring movers cost money. Moving is a major hassle. The landlord knows that. But there are also major hassles for the landlord if you leave as well. If it’s a private landlord, then that landlord has to deal with finding a new tenant. If you’ve been a good tenant, there’s all the more anxiety on the part of the landlord that the next tenant might be a deadbeat.
Management companies with large buildings aren’t immune to these pressures either. They have to pay for staff to show the apartment. Their algorithms take into consideration the wear and tear that comes from each apartment changeover. They are also acutely aware of the fact that the apartment might sit vacant, thus losing money without an occupant.
Feel free to point these things out to your landlord. If you’re being told that a 5% increase is the standard amount, while you’re proposing that the rent stay flat, don’t hesitate to point out that the landlord is risking a vacancy and a new tenant over a small difference in price. If you like your apartment, offer to stay longer as a way to keep overall costs lower (just keep in mind the costs associated with breaking the lease).
Don’t accept the first offer
There is absolutely no harm in asking. When the annual rent increase shows up, make it a habit for you to immediately go back to the landlord asking if you can forgo the rent increase this year. Something as simple as “I received the proposed rent increase yesterday. I like living in the [apartment/building/neighborhood] and would be willing to stay if we can agree to keep the rent the same this year. If that’s not possible, then I’ll need some time to consider this increase as I’ve been thinking about moving to [apartment/building/neighborhood].” What’s the worst that could happen? You’ve put the landlord/management company on notice that you’re not an automatic renewal. If they value keeping you in the apartment, they might just agree!
Joshua Holt is a practicing private equity M&A lawyer and the creator of Biglaw Investor. Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and is always negotiating better student loan refinancing bonuses for readers of the site.