Setting Rent – What to Know

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Getting the right tenant for your rental property can be a challenge. A good first step, is setting rent at the right price.

The amount you charge for rent will factor into the amount of response you get with your rental listings.

Too high of a price and you’ll get little to no applicants for your rental. Too low of a price you risk losing profits.

In this week’s video, I discuss how to figure out a proper rent range for setting rent prices.

Setting Rent Prices: Resources

Rentometer.com – A nice free service for seeing rent estimates:
Zillow.com – A listing service with an estimating tool
RentRange.com – A paid service for a full rental report

Key Takeaways From Video

What you really need to do is figure out the realistic rent range for your property.

How to figure out the right rent amount

Every rental has a range you can charge for rent and you can do research in several ways to figure out what that range is.

I’d recommend using free services to start and get to know landlords in your area. Ask what they’re charging for rent as this is a helpful way for determining rent ranges.

Realtors and landlord associations are a nice resource to tap into as well.

In my opinion, one of the best things you can do, is to find a way to bring the quality of the rental to the higher end of the rent range.

Setting Optimal Rent Price

Two things happen at that intersection in the image above.

  1. You maximize the rent you can charge for your property
  2. You attract higher quality applicants

There’s a correlation between poor quality rentals and poor quality tenants. In the same token, high-quality rentals attract higher quality tenants.

It really comes down to what you can afford to put into your rental and what you’ll get in return.

I’m of the mindset that it is easier for a renter to take care of your rental if it’s already in good shape and shows nicely compared to comps in your area.

Here are three other methods for setting rent:

Add Percentage

The most basic of pricing strategies is to take your cost and add a percentage to it. If your cost of one apartment unit is $1,000 to maintain (for both short- and long-term), you could simply add 25 percent to that figure to arrive at $1,250 per month for each rental unit.

But that pricing method does not really factor in vacancy rates, natural disasters, or rising costs. So you must put in a “fudge factor” that will have to cover those unknown and unforeseen costs. Therefore, in order to get a return on investment (ROI) of 25 percent, you may have to add 30, 35, or even 40 percent to the marginal cost of maintaining one apartment unit.

Comparisons to Ownership

Some property owners set their apartment rents based on comparisons to home ownership (mortgage payments) for similarly sized properties. This can work but it certainly is not optimal. In fact, when home prices are falling, as they have been the past 3-4 years in many areas, rents have been going up.

This is because as houses became less desirable, rentals became more desirable—people still need a place to live and if they do not want to live in a house, they are forced into living in an apartment or rental of some sort.

If you had practiced this method of setting your rental prices, you would have left a lot of money on the table the past 3 to 4 years.

Market Rates

Another pricing method that property owners employ is taking a look at what surrounding properties are charging and setting their rents based on what their competition and peers have set. For example, a 2 bedroom 2 bath apartment unit down the street in a similarly equipped and furnished apartment complex, at about the same age and condition, may rent for $1,500.

It would be really easy to set your rent at $1,500 or a bit less if you want to ensure that you “win over” any prospective tenants from your peers. However, your apartment complex really may be more desirable and may be able to garner a higher—in some cases, much higher—monthly rent. You would not know that if you simply followed the crowd.

This last method, basing your rents on what your peers are charging for similarly-priced rental properties, is probably the best. You may want to experiment with slightly higher and slightly lower prices to determine just what the market may bear. You could wind up with better profits than your peers. There is also the notion that higher rents equate to a higher standard of living—you may get more interested prospects simply because you are charging a higher rent than the guys down the street. This “perceived value” concept goes a long way to determining the leaders and the followers in any market.