Landlords Explain the Benefits of Charging Tenants Below-Market Rent

Ted and Jamie Garber have a counterintuitive strategy for shedding cash flow from their rental properties.

“We always rent at or below market rates,” the Florida-based couple who own 28 units across 15 commercial and residential properties told Business Insider.

They’ve found that it drives a lot of tenant applications and helps prevent tenant turnover.

Plus, “our tenants value the fact that they’re renting slightly below market rate, so they’re going to want to take care of the place,” said Ted, calling it a win-win. “They’re getting a deal, and we’re still making money from it all.”

Despite renting at or below the average in their area, the Garbers earn six figures in “mostly passive” rental income, said Ted. They started buying rentals in 2020 to accelerate their progress toward financial independence and estimate that they spend about 10 hours a month on real estate-related activities.

Their philosophy on increasing rent is property and market-dependent. With insurance premiums surging in Florida due to increased costs from natural disasters, sometimes increasing rent is inevitable. But it’s capped, said Ted: “We have it built into the leases that it’s a maximum of 5% a year.”

In other areas where they own rentals, it doesn’t make sense to increase rent.

“For example, our new single-family homes are oversaturated by institutional investors that came in — like Invitation Homes by Blackstone — bought a ton of properties in that growing area, and flooded the market with rentals,” he explained. “I was able to get ours rented within days of closing because of my marketing and listing, but you still have to factor all that in. So in those areas, I’m not going to increase because the supply is way outpacing the demand.”

Washington-based investor Dion McNeeley, who retired early thanks to his portfolio of rentals, also believes in providing below-market rent.

He uses what he calls the “binder strategy” to include his tenants in the pricing conversation. He’ll set up a meeting with his tenant and bring a three-ring binder. The first page features a picture of the property they’re renting and its cost.

“Most tenants aren’t looking at home prices unless they’re looking to buy,” he said. “My last property was $400,000 for a duplex. Before that, I paid $525,000 for a triplex. Those are big numbers to a renter, so you point out the current price and say: ‘That’s what my taxes are going to be based on. That’s what my insurance is going to be based on.'”

The second page includes a map showing his property and all the rentals in the surrounding area with the same number of bedrooms and bathrooms. McNeeley walks his tenants through the binder to educate them on market prices and explain how much they’re paying below the average.

He gives the example of one of his duplexes. When he bought it, both tenants he inherited were paying about $1,100 in rent, but the market rent was closer to $1,600.

“If I just went to those tenants, and I said, ‘I’m going to raise you to $1,600,’ I would be a jerk and they’d probably move out,” he said. When he sat them both down with the binder and asked what they thought a fair price would be, “the tenants asked for more than a $300 increase because it’s still below the area average and they’re still getting a deal.”

His tenants rarely ask to pay market rent, he noted: “I’ve never had a tenant say, ‘If the average is $1,600, we should raise it to $1,600.’ I’ve also never had a tenant say, ‘I think it would be fair for it to stay the same or for it to go down.'”

In the long run, he’s saving money by maintaining good relationships with his tenants and avoiding turnover.

“Happy tenants don’t trash the place, and they don’t move, and tenant turnover is one of the most expensive things a landlord has to deal with,” he said. “I’m making tens of thousands of dollars more in the last few years than I would have if I raised the rent to the area average and then dealt with a bunch of turnover.”