Setting Rent Levels - Do the Math

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Setting Rent Levels - Do the Math

Posted by Nick Chandley-OP MGR on Saturday, March 24th, 2018 at 5:07pm.

It is natural to want to obtain the highest rent possible when your property is vacant. Extended vacancy can cause frustration, anxiety, and result in financial hardship on the landlord in some cases. While it’s tempting to test the top of the market when setting your asking price, holding out for more money can be a costly strategy and potentially result in a net loss. 

Qualified tenants know they are desirable customers and shop aggressively online to find the best value for their rental dollars.  Information is easier to obtain than ever before, so they simply ignore those asking higher rents to locate comparable properties for less.  Unless there is some compelling factor such as proximity to work, a desired school, or being in a particular neighborhood, tenants will choose the property they perceive as the best value.

For the landlord, it’s ultimately about cashflow and net income.  For that reason it’s prudent to use a mathematical approach. Examine the cost to carry the property vacant for one month. Factor in expenses such as mortgage payments, taxes, homeowner association dues, insurance, repairs, and lawn maintenance. Even if the mortgage payment is low or non-existent, the inherent risks of having property vacant (vandalism, unreported damage) make it unattractive to leave property empty for an extended period.  

If carry costs on a property are $1800/month, it costs $60/day for the property to sit empty.  A $50 reduction in rent represents a $600 discount for a one year lease – or 10 days of vacancy.  If your property rents two weeks sooner because it’s perceived as a bargain by potential renters, your net income goes up for every day earlier the discount makes a difference.

Each rental cycle is different, and market conditions change.  More available rentals, fewer, military movements and resulting spikes in demand – all should factor into the decision to set a price point.  All else being equal, the less expensive of two similar properties will rent more quickly.  Tenants are looking to get the best bang for their rental buck. 

Experienced property managers evaluate market conditions before recommending a price, and should be able to support that recommendation with data.  Landlords should be wary of prices shown on major internet sites for a couple of reasons: a) they indicate asking price, not the price at which properties actually rented; b) they contain many “rent by owner” listings which frequently have unrealistic pricing. 

Ultimately it is a sound business decision to be aggressive with pricing to reduce vacancy and increase your net income.  Tenants in single family dwellings tend to stay longer than one leasing cycle, so there is always an opportunity to adjust rent at renewal time.  Naturally you would weigh the possibility of vacancy in determining any rent adjustment.  Having good information and facts on which to base your rent figure is your best negotiating tool with existing tenants.

Professional property managers like those at The Real Estate Group understand the process of setting market rent and constantly monitor the ebb and flow of demand.  Call our team at 757-512-7225 for a free market analysis.  Let us show you how easy it can be to own investment property with a pro on your team.

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