Setting the rent price for a rental property is not an estimation; it’s a calculation. Over-pricing will lead to vacancies for owners, especially when rent is based on your needs rather than what local tenants will pay by factoring in that you have $2,400 per month in obligations for a mortgage, property tax, and insurance. What a tenant will pay, however, is not affected by your specific obligations.
You’ll struggle to draw renters to your place at $2,600 when comparable apartments for rent in the vicinity advertise at $2,200; just a month without tenants means a loss in rent.
A common overpricing amount-around 5%-usually results in rentals taking twice as long to rent and actually results in less money in the long term. To estimate rent, take three rental listings of comparable nearby homes and apartments that were recently occupied. To do this, take into account such aspects as the size of the apartment or house (square footage), number of bedrooms, baths, the monthly rental cost and how other amenities differentiate units. Use the rent per square foot to find a general figure.
Then make price changes for quality or condition.
Do not try to justify rent increases based on your personal ownership history or minor renovations completed over the years. When you have a benchmark for comparable rentals but don’t quite have a perfectly comparable property, take into account other benefits or drawbacks. Landlords can either shortchange themselves or price themselves out of the rental market entirely. A local property manager has detailed knowledge of the region’s rental market and is able to offer suggestions and insights beyond what rental listings may show. That experience can help avoid overpricing or leaving money on the table. Of course, a place with in-unit laundry or reserved off-street parking will command higher rent, while an outdoor patio or brand new kitchen might bring more, but be specific and be able to give dollar amounts, not a vague notion of an increase. When a unit doesn’t feature an amenity typically included in rental properties, such as a/c, a reduction of price should follow. To calculate optimal rent, remember the annual revenue goal.
It’s helpful to analyze rental price from an annual viewpoint and not monthly when considering things like vacancy. When determining that a given rental might lease for $2,100 and another at $2,200, for instance, factor in the typical vacancy during a year. An apartment or house leasing for $2,200 that can count one month out of twelve vacant, would then net $24,200 a year in rents; with no vacancy, one leased at $2,100 a year will rent for $25,200-and that’s even without the increased cost of utilities, repairs, or ongoing mortgage on a vacant property; a unit with fewer vacancies is more desirable long term.
A key problem in determining a unit’s market rate is ignoring seasonality.
Typically, demand will peak during summer and late spring as families are in search of accommodations because of school break and holiday destinations will fill up for vacation rentals, while winter months may see diminished demand; therefore, be sure your lease agreement concludes around the start of a popular rental season. Tenants may be more likely to accept a lease price hike of 50 to 100 dollars when their move-out date falls around a high demand season; as they are likely less keen to begin an active apartment hunt at this time. If the lease price doesn’t cover all the costs of doing business such as taxes, interest on a mortgage loan, insurance payments and property taxes, and in the case of a homeowners association, the HOA fees as well as money to set aside to handle necessary maintenance on the rental unit itself, that is the first problem; in addition, your revenue should be enough to support the operating expense ratios. While most owners tend to estimate based on feeling or what their monthly expenses are, remember that you’ll have to remain competitive in a local rental market that isn’t going to acknowledge your specific situation.
You’ll need to take into account local changes in demand due to external factors.
For example, economic activity that’s booming in an area may raise average rents, and new construction or zoning changes might also affect rentals; Atlis Property Management can provide local expertise beyond generalized market data. If tenants refuse your asking price for the lease terms, offer a concession instead of permanent rent reductions. If rents are stagnant, then you will need to be cautious about decreasing your contract price to achieve a leasing agreement with your prospective renters; although, it is wise to offer a concession instead, such as first month’s rent free for a rental agreement.
Concessions provide a one-time discount, whereas dropping the contract rate has a permanent cost: decreased income on every future lease period. In other words, if tenants are willing to renew for additional periods, the reduction in price will affect you over time.
