As landlords we only make money when our units are filled. In fact, eliminating your vacancy factor, the percentage of time that you property remains unrented, may be the only opportunity for you to see a profit.
That is why it is so unfortunate when I see landlords make a mistake in their pricing. There are two ways to price your rental: the expense method and the at-market method.
Some landlords price their rentals based on what they owe. They add up their mortgage, taxes, insurance, upkeep, management fees, add in some profit, and, bingo, they have their price. This is the expense method of arriving at a price; you add up all your expenses and you have your price.
That is certainly one pricing strategy and, depending on your expenses, it may be a valid one. But could that method cause you to leave money on the table? Or could it price you out of the market?
Let’s say you have a rental that you have on the market for $1,000 per month. And conveniently your expenses total $1,000 per month. Using the expense method would work fine for that property. However, what if the true market rate rent was only $750 per month? Using the expense method would cause you to be $250 over market price.
Just as painful, what if the true market rate rent was $1,400 per month? Using the expense method you are cheating yourself out of $400 per month of rental income. That is $4,800 per year of lost rent.
Professional landlords price their rentals at the market rate. When you bought your property, your real estate sales professional used comparable prices of similar properties in your neighborhood, also known as comps, to discover the current fair-market value of the property. You can use comps to find out the market price of your rental.
First, start with driving your own neighborhood and look for “For Rent” signs. Call those property owners and find out how much they are asking, what is included, and any special features.
Next, go online and research the websites of local property management companies. What do they have for rent with a similar square footage, bedrooms, and bathrooms in your neighborhood?
Then check to see what deals and specials the newer apartment buildings in your area are offering. Many apartment buildings offer great amenities, newer interior finishes such as granite and contemporary colors, shorter lease terms, and discounted security deposits. That is a strong challenge to compete with, so you need to know what they are charging.
Finally, have your professional real estate agent search the local Multiple Listing Service (MLS) on your behalf and provide you with a list of active rentals.
After you have completed your research, you will know the market price for your rental. The closer you set your price to the market rate the quicker your property will rent. But before posting that price, let me give you one other bonus tip.
I am fixated on eliminating my vacancy factor. I would rather collect rent than allow my property to sit unrented. Therefore, I am willing to rent my personally owned properties out at slightly below market value. They will rent quicker and the tenants tend to stay longer.
As landlords our desire is always to make money. Both the expense and at-market method can work, but I believe the at-market method to be superior. At the very least, if you use the expense method, you should go through the exercise of the at-market method to make sure that you did not leave any money on the table by setting your rent too low. By following these simple pricing strategies you can dramatically improve both your money making ability and save yourself time in the process.