The Magic of Setting Rental Rates
Bluestone and Hockley Real Estate Services
Have you ever wondered if the rents you are charging for your rental units are in line with the marketplace? Does it take a long time to rent up your property or does it rent in a day? If you have more phone calls than you can handle, you may have priced the property too low. If you have no phone calls, maybe you are priced too high.
Investigating Rental Rates
A good place to start investigating your rental rates is to look in the local Sunday paper. Notice that the classified section is divided by geographic area. Location is the most important guide to value for a renter. The same 3-bedroom, 1-bath house will rent for $500 in one part of town and $750 in another. Most people look for a location close to work or close to schools for themselves or their children. Many people also want to live in hip or trendy neighborhoods or in neighborhoods where they grew up in, close to friends or family members. Older renters like to live close to shopping and medical suppliers, like doctors or hospitals. Some renters want to live close to major arterials or freeways to speed up their driving around town.
Every city and town has a different rental patterns in many cases depending on geography. You have probably heard of the “West Hills” or the “south part of town” or the “Northwest neighborhood.” Sunlight drives value. The brighter the area and the better the views, the more motivated people are to live there.
The income or budget of the renter will also drive the decision of where to rent. Most tenants have limited funds and at the same time they have needs they want to fill with those funds. Some tenants want a swimming pool, some want a quiet neighborhood and some just want a small studio while others need more room. In many areas, square footage of the rental will drive the rental value. In other words, the bigger the apartment or house is, the more money you will get.
Rental Rates Do Have an Upper Cap
Remember that when 67% of the nation are homeowners and only 33% are renters, there is a level at which renting a house does not make sense. Few will want to rent especially when the interest rates are low, the builders have overbuilt, and the now down financing is very attractive. Also remember Uncle Sam helps those that own homes with interest deductions on their taxes. Those that are on a short-term assignment (1 – 3 years) and are in the higher income bracket will rent. Otherwise, they will buy a home.
You could join the local apartment owners association to share rental rate information with other landlords. You will find that local trends will affect you as well as others in the marketplace. If you think you have set the rent right and the property still is not renting, maybe the property is facing an economic slump that is affecting all owners. Or maybe the lawn need to be cut, or your clean is not as clean as the tenants would like it.
Maybe you are advertising in the wrong place. Is it is possible you bought your investment property in the wrong location and there is a lot of crime, and that is keeping tenants away? Is it possible that your property is in Texas and it does not have an air conditioner, or could it be in the Northwest and your heat supply is very expensive? Just last week a tenant looked at one of our properties and was accepted as a tenant but decided to turn down the unit because it had ceiling heat and very high electric bills.
Basic amenities also drive the rents. Dishwashers, washer/dryer hookups (or a convenient laundry room), off-street parking, and cable TV hookup are some basic examples. If those are not available, consider renovating to compete or find another angle that will attract tenants, like hardwood floors or views. Most tenants are not attracted to dilapidated settings.
Market Statistics
Great marketing and advertising will also have an impact on your ability to rent. It is important to keep track if the market statistics. Factors like new job creation, new people moving into town or out of town, number of units in the pipeline, and new homes under construction will help give you a feel for the marketplace. This will let you know how to time your leases and their expirations as well as your rent increases. Sometimes in a weak market you need to offer some concessions like free rent, a TV, or lower move-in costs to attract tenants to your investment.
You can always set your rents a little high and see if the phone rings. It is easy to lower a rent than it is to increase the rent. It is smart to annually review the marketplace and stay in touch with changes in the marketplace. Nothing replaces the time you take to inspect the property and decide that you would live there. Don’t cut corners. Remember that happy tenants stay longer and will pay rent increases.
The magic of setting rents lies in your ability to track the market, which is fairly easy now with the Internet, and being in tune with it. A good location will help will drive your rents. An annual review of your rents is a good business practice. Setting the right rental rates will make or break the cash flow of your investment. Setting your rent too high means an extended vacancy. Rents that are too low affect your cash flow. Good luck.
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This entry was posted on Wednesday, January 1st, 2003 at 12:00 am and is filed under Articles, Property Management, Renting. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.
