Determining monthly rent is simply a calculation when you have the correct information and data. Landlords and managers often incorrectly price their rental property.
Landlords must evaluate the rental price on facts and numbers, not emotions. I find landlords and real estate investors put a premium on rental features (e.g. the type of tile on the kitchen counter or some other small aesthetic feature) that renters do not appreciate as much.
In this article, you will learn how to initially price a rental, factors that contribute to the rental price, when to adjust the price, and the consequences of not following this simple process. If your property has been on the market for 30 days, then read every category carefully.
Part 1: Initially Pricing a Rental
There are three approaches to calculate the rental rate, and it’s recommended to use a combination when possible:
- Market Analysis:
Take a look at the currently available listings. The best resource is Zillow:
- Type in your rental property’s address
- Filter for the same number of bedrooms, bathrooms, and square footage
- Search for other similar rentals in the area.
Check the comparable properties to see their listing price. This analysis puts you in the shoes of the tenant, understanding their other options. When your property is listed higher than comparable rentals, tenants are more likely to view the surrounding rental properties first. It doesn't matter if your property has a better color marble counter, as that is not always objective criteria.
- Type in your rental property’s address
- Historical Trends:
Research the historical rent rates for your rental. Take the prior rental rate from your past tenant’s signing date and apply your county or city annual growth rate. You should arrive at a value that combines historical trends with current value.
- The Data Driven Approach:
The internet can also be a useful resource in determining rent. Online tools, such as the Rentometer, use large amounts of data to determine rental prices. While these tools are not always the most accurate, they can provide a baseline to compare with the two above approaches.
Part II: Other Factors Affecting Demand
Market rates and trends will provide a good indication for the rental range, but the below questions also factor into the demand and desirability of your rental.
Is my advertisement too restrictive?
The goal is to attract as many qualified tenants as possible. If you have a bunch of restrictions on who can qualify, then you are narrowing down the number of applicants.
- Pets: Am I not allowing pets even though a large portion of renters have pets? Many large cities are boasting 50 percent of residents have pets. Do you want to restrict 50 percent of the market via a strict “no pet” policy? Read more about pets here.
- Term: Do I have an awkward lease duration, such as 6 months or 3 years? Most tenants are accustomed to a standard 12 month lease. If you want to rent for longer than 12 months, we recommend negotiating the lease duration after you have qualified applicants. One of your objective criteria can be that the tenant willing to sign a longer lease gets accepted over tenants with a shorter duration preference.
- Furniture: Am I offering a long-term, furnished rental when the majority of tenants are looking for unfurnished?
- Security deposit: Is this higher than deposits from others on the market?
- Other lease restrictions: Check your lease against leases of other professional managers. If your requirements are too strict (e.g. (1) all tenants must move out if one moves out and (2) credit over 750 is required), then you may have a more difficult time converting applicants to tenants.
Am I advertising well enough?
- Article: Read the Secrets to Advertising your Rental
- Channels: Are you advertising on only a couple of listing websites, rather than leveraging the best software that markets to the largest rental listing websites? Aim to advertise your rental on at least 5 top rental listing websites. One of these websites should be Zillow, since they generate more traffic than most listing websites.
- Pitch: Your photos and content dictate your rental's appeal. It takes only the initial setup of quality photos to succeed when your property is ready for the next turnover.
- Response time: Are you waiting a day to respond to tenant inquiries. Tenants expect professionalism and a nearly immediate responses to set up showings.
What other factors adjust the price?
- Type of Property: Luxury properties tend to stay on the market for longer, as there are fewer tenants who can afford these rentals.
- Aesthetics: Renovations, remodels, and upgrades can have a huge impact. In other words, does my property look more appealing than other properties in the neighborhood?
- Neighborhood: Your rental may be in an area without zoning restrictions or where the next street over has widely different pricing. In these cases, adjust the rental price based on true comparable properties.
- Seasonality: As a rule of thumb, winter months tend to be the worst time to advertise your rental. This is especially true in areas where the climate boasts snow and below freezing temperatures. In areas with single family homes, this statement is even more prevalent since parents prefer not to move while school is in session.
Part III: Adjusting Monthly Rent
There are very few cases where your property should be on the market for over 30 days. As outlined in Part II, luxury rentals tend to stay on the market for a longer duration due to fewer applicants.
If you are finding that you rental has been on the market for longer than a month, here are some recommendations:
- Review your currently listed price to that of the market. Most likely, you have priced your rental too high. Most landlords think their property is worth more than it is actually worth. After all, you purchased it over other options in the area.
- Review your criteria - maybe you should allow pets or reduce your qualification criteria (e.g. credit score) in order to obtain more potential tenants.
- Check to see where you are advertising. Advertising can dictate how many potential renters you are attracting. Make sure these advertisements are up-to-date and are posted on major online websites. Think about potentially expanding advertisement if current options are not adequate.
Part IV: Consequences of Vacancy
When “Days on Market” (the number of days the rental is advertised) is higher than 30 days, there are emotional and financial consequences.
From experience, anxiety brings the vacancy to the top of your mind. You are less productive in other areas of your life. And, you may even question whether being in the rental industry is worth the headache. When this happens, go back to Part I through Part III and carefully evaluate the rental advertising process.
You lose money every additional day that your rental is vacant. Listing at or below market can actually generate more cash flow because of reduced vacancy. And most investors and managers do not perform a calculation on the opportunity cost of vacancy. For example, if you list your property at $5000/month, but it remains on the market for 3 months, you receive $0 for that time period. Another option would be to drop the price to say $4,800/month. While you would receive $200 less per month than normal, you still make $14,400 over the same 3 months rather than nothing. Now that $200/month difference doesn’t look so bad. Cha-Ching!
It is important to understand why you have too much or too little demand with your rental property. With technology, pricing is more transparent to landlords and tenants. As a landlord, you must be willing to recognize the shifting market and compromise when needed to fill your rental unit.