How much rent should you charge?
The answer may seem pretty easy to figure out. However, many landlords base their rental on bad assumptions and realize too late after hundreds, sometimes thousands, of dollars have been lost. In this discussion, I want to point out some of the most common assumptions that are wrong and costly.
Wrong assumption #1: Charging a little less really doesn't make a difference. In fact, I may rent the place a little faster.
One of the primary ways for determining the value of rental property is by the amount of income it brings in. The more the monthly rent, the more the overall value of the property. When you charge 10% more in rent, the value of the building also goes up 10%. If you are considering selling, refinancing, or trading in the very near future, you should have the rents set as high as you can get them so you can justify claiming a higher property value.
The exception to this rule is if you are selling a single family home to someone other than an investor who wants to live in the property as their home. Your rental income means little to them, and they will give you top dollar based on the looks of the property more than anything else. I recommend selling to home buyers instead of investors.
Wrong assumption #2: Lower rent will encourage tenants to call less, be more cooperative and do more of the repairs themselves.
Your rental rules and policies alone will determine how cooperative a tenant is. Tenants don't think in terms of paying a lower price than normal. They just know their rent is so much and if they are going to be uncooperative, it doesn't matter how low your rent is. In fact, the people who pay the most rent bother me less, and tend to take care of minor things on their own.
Wrong assumption #3: My expenses determine how much rent I will charge.
This thinking produces two bad extremes. First, there will be a few landlords who think that the tenants will have to pay for the land- lord's mistake of buying the place to begin with. Perhaps you bought the property for too high a price and have high mortgage payments or numerous problems to be fixed. Now your monthly expenses are high, so you figure the only solution is to charge a high rent.
The problem is that tenants don't care what your expenses are, and expenses can't determine your rent. The only thing that ultimately determines your rent is how much is someone willing to pay you for an extended period of time. So if you know you must have a high rent to cover expenses, you should be spending your energies to improve the look of the building. Find ways to add incidental charges to the basic rent to increase the cash flow, like a $25 extra for garbage's, pets, appliances, draperies, parking, a roommate, etc. Don't lose money sitting by the phone waiting for someone to pay high rent when they can get similar accommodations elsewhere for less.
Landlords with the opposite set of circumstances, with low, if any mortgage payments and low expenses, set their rents a lot lower than they could be getting. Obviously this thinking is costly as well to you and your family. Sure it makes you a "nice guy" to your tenants. But if you could easily be getting higher rents, do so. Then if you want to be a nice guy, give bonuses for their cooperation in making early rental payments or referring new tenants. Make improvements on and in the property that will make the tenant happy. This will keep good tenants longer and will raise the value of the property.
Wrong assumption #4: I can compare my rental units to other units and base my rent on what others are charge.
This is a good way to start, and to get a ball park figure for what to charge. However, there are so many factors that determine how much someone is willing to pay for your particular rental, and there is really no other comparable rental just like yours. It's easy to estimate incorrectly. You may be comparing your rental with someone who is charging far- below market rents or with vacant places advertised too high. If you do look for comparisons, get at least three others, use those in the same area (on the same street if possible), and with basically the same visual appeal and features as yours.
After you have surveyed other vacant units near by, use your own vacancy as the true test. Start off asking a little more than what the market indicates. Advertise fully through all your referral networks, including tenants and local businesses, and place a short ad in the paper, with the price listed. See how many people respond to the price. You will soon know if the rent you are asking is realistic. If many respond but turn away after seeing the unit, you know the problem is not the price but the visual look of the rental. It is better to upgrade the look of the rental with inexpensive but elegant touches, rather than drop the rental price. If however, the entire area is only up to a certain standard that you have already surpassed, you're probably fighting a losing battle. So don't hold out too long for the price you want.
The holding period is a key consideration in setting your rental price. It's extremely important to keep a good working relationship with tenants. Even if they run into financial problems, you want them to let you know ahead of time if they plan to move, instead of discovering 2 weeks into the next month that they moved out 4 weeks ago. I suggest telling tenants that even if they have to move in a hurry, they can give you a week's notice. You will consider returning part of their security deposit, if they will leave the unit in excellent condition, show the units to prospects, and help you find a new tenant before they actually move out. Returning part or all of their deposit under those circumstances is well worth it, especially if they have kept the unit looking good. Most important, you have time to try to get a rental rate higher than the amount the present tenant is paying. Be sure and ask tenants not to tell others the rent they are paying.
Don't panic when a place becomes vacant and start dropping the price drastically. Keep doing all you can to make it show well, because a lower rent is not necessarily the right rent.
Wrong assumption #5: If all my places rent quickly and everything is rented, I must be charging the right price.
Actually when this occurs, more than likely, your rents are lower than what they can be. If you have a low turnover rate, this is another clue that your rents may be lower than what others charge, or you may just be utilizing the many tips mentioned in this column each month, and becoming and excellent landlord.
I've mentioned two important factors in obtaining the rent you set: advertising and visual appeal. I have confidence in my advertising network and the visual appeal of my properties. Therefore, after I make sure each of these areas are at maximum effort (get more than just your opinion). I will drop my price after a short period, because I don't like to gamble and lose sleep or money trying to get the absolute maximum rent possible. But make sure you are giving those two areas your maximum effort. Most landlords who are forced to charge lower rents, are weak in one of those two areas.
If you want low turn-over rate, the easy way is to set your prices below what others charge. However, unless you have a superb tenant, it's not worth losing the extra income. Don't ever take the easy way out because the place has low visual appeal. It's well worth the extra dollars spent to improve the quality of both the property and the potential tenant. Crummy rentals welcome crummy tenants, which will cost you a lot more than reduced rent.
The right assumption to make is that your occupied rentals are worth more than you are presently charging.
I joked earlier about becoming an excellent landlord; however, you are the determining factor in most cases on whether tenants feel you set the right price. High rents can be accepted, if you do your job well. But even the lowest rent is too high when you do your job poorly.
Jeffrey Taylor is Editor of the popular monthly newsletter, Mr. Landlord, which is published for do-it-yourself landlords and landladies. For a free copy call 1-800-950-2250; mention ComPortOne.
Reprinted with permission.