As a landlord, it’s easy to become overwhelmed by the thought of setting the perfect rate. If you go too low, you leave money on the table and risk damaging your cash flow. If you go too high, you risk high turnover and prolonged vacancies. The question is, how do you find the point of equilibrium?
The Importance of Having the Right Rent Price
There are plenty of factors to think about when evaluating and marketing a rental property. But at the end of the day, price is something that almost every tenant considers. Here’s why you need to pay careful attention to setting the right rate:
- Refines your pool of renters. Every renter has their own budget. In fact, most search for rental units in their area based on price. That means your rental rate actually acts as a filter by refining your pool of renters to the people who are looking for units within a specific price range. If you’re charging $1,500 for example, you’ll run off the tire kickers who need a unit for $900. (This works in reverse, too. Most of the time, people who are looking for a unit for $1,500 won’t be interested in a unit that’s priced at $900.)
- Helps you get paid on time. Payment problems are consistently rated as the top concern for discerning landlords. (That’s because eviction expenses related to nonpayment can cost as much as $10,000 in fees, vacancy, and other expenses.) With the right rate, you can ensure you’re hitting a sweet spot that people can reasonably afford (which lowers the risk of not getting paid).
- Ensures proper cash flow. When it’s all said and done, you need to charge enough to cover your mortgage, taxes, and other carrying costs. Not only that, but you need enough extra margin to generate a positive return on your investment. The right rent price will ensure you’re profitable.
Tips for Setting the Correct Price
Setting your rent too high will run off good renters and put you at risk of experiencing prolonged vacancies. Setting rent too low might help you get a tenant, but will hurt your ability to generate positive cash flow. The key is to set it just right. Here are some tips for doing so:
- Automate the process. Use a rental estimate tool to find everything you need to know in order to set an accurate price that reflects the current state of the market (taking into account things like supply, demand, vacancy reports, comparable rates, etc.). These tools pull data from thousands of sources to come up with accurate trends and ranges for your specific market or neighborhood, which removes most of the guesswork from the equation.
- Study current listings. Don’t get too hung up on what long-term renters are paying. (They often pay much lower rates as a result of being “grandfathered-in.”) Instead, pay careful attention to the current listings in your neighborhood and how long they sit before the vacancy is filled. If you see comparable properties renting for $2,000 per month and the listings are always removed within 48 hours, this is a sign that you can charge at least $2,000. If, on the other hand, these units are sitting for two weeks before having the price reduced to $1,700, it tells you that the $2,000 price point is inflated.
- Consider timing. Seasonality has an impact on rent prices in most markets. Typically, demand for rentals is highest during the spring and summer months. This is followed by a plateau in late fall and winter. This swing in supply and demand can have a minor impact on rent prices (particularly if you’re in a market with severe winters).
Adding it All Up
No two rental properties have the same profile. The fair rate for your property will depend on a myriad of factors and circumstances, including location, square footage, condition, amenities, bedrooms, bathrooms, etc. But at the end of the day, it all comes down to supply and demand. Low supply combined with high demand will cause rent prices to skyrocket, just as high supply with low demand can cause it to plummet.
Make sure you’re constantly aware of what’s happening in your local market so that you can make educated decisions about how much to charge. You won’t always hit the sweet spot, but your attention to detail will help you get pretty close.