Smartmoneybro Landlord Tip: How to Determine Monthly Rental Rates
The answer to this often discussed question depends on a number of variables, but the most important is "what are the current rental rates in my area, for rental property with the same amenities as mine?"
My advice: Don't be penny wise and pound foolish
There is nothing productive about having an empty rental. Remember, you are in this business to earn money and you do not make a profit if your property is empty. You have to be able to fill your rentals quickly and efficiently. When deciding on a rental rate do not get over zealous. The urgency will be to over price the rental. Over pricing your rental or pricing it at the very top of the market will add to the risk of that property remaining empty for longer. Some would argue that you get a better tenant by pricing your monthly rental rate at or above the market value, but I would argue that the $50 or $100 difference in your monthly rental price will not come close to guaranteeing you have a good tenant that will pay on time and take good care of your house. Also, you should have a well thought out screening process that handles the “screening tenants” portion of your business, and the thought of using a higher monthly rental rate to weed out bad tenants, makes my me cringe as an experienced landlord. Your focus when determining your monthly rental rates should be based on the market, and not an empty assumption that you may find a better tenant if you charge more. Some of my most reliable and conscientious tenants have been tenants that paid at or below the market value for their rent. Don't fall into the thought that the tenant that pays $600 per month is less responsible, less intelligent, or any more troublesome than the tenant that pays $750 per month. Determining your tenants ability to pay and maintain your property is a process in and of itself and should not be confused with or tied to whether or not you decide to charge an extra $50 or $100 per month. They are two mutually exclusive events for the purpose of this article. Now, if we were discussing the difference between paying $1500 per month and $500 per month, then there are statistics that would allow us to draw conclusions that there is a correlation between rent amount and quality of tenant. But in this case, we are talking a few hundred dollars at the most, and therefore the correlation is non existent regarding the crux of this article.
First, when determining your monthly rental rate, you must take the steps to find out what the market value is currently in the area of your rental. Take a good look at houses that share the same or similar amenities. You can easily spend a Saturday, during the mid-morning and early afternoon actually canvasing (driving) the neighborhood and contacting homes with FOR RENT signs in the yard. Go through Craigslist for empty rentals in the area, and other local publications that advertise rental properties. When you make these calls, you will be speaking to other landlords. Use that opportunity to pick their brains. Other landlords will assume you are a potential renter, but 3 questions into their talk with you, they will soon know you are a fellow landlord. Tell them you are a landlord and again, continue to pick their brain. You will learn a ton about the market and about your neighborhood. Many will gladly share information. Yes you are competing with other landlords in your area, but you can also take whatever opportunity you have to learn from them as well. After calling 5 or 6 of these, you will have a good sampling to determine the average rental price of rentals that match your unit.
My advice: PRICE YOUR RENTAL UNIT AT OR BELOW THE AVERAGE MARKET PRICE.
Here is a quick example to illustrate this very important point:
If you rent your property for $800 per month instead of $900 per month, you lose $1,200 ($100 x 12 months) per year. However, if your property stays empty for an additional 2 months because you overpriced it and advertised it at the very top of the market in the neighborhood, then you lost $1,800 ($900 x 2 months vacant). So in this quick example you could be losing $1,800 in an effort to gain $1,200. Not a smart landlord move. That few extra dollars that you could be trying to squeeze a potential tenant for could cause you to lose substantially more than you would have lost by simply lowering your monthly rental rate. This technique has always been one that has worked out well for me, so I suggest it to fellow landlords. Again, don't be penny wise but pound foolish. Think long term and look at the big picture. Five years of overpricing your empty rental could result in thousands of dollars lost.
BONUS TIP: One very important best practice is to always consider a vacancy rate when figuring profit or income. Whenever I look at yearly projections on returns, I always factor in a 10% vacancy rate. As a landlord, your unit will be empty at some point. Regardless of how stable, well entrenched, and reliable your tenant from Heaven is and has been, your property will be empty at some point and its always safe to conservatively assume that will be this year! An empty rental home is like loss profit, so it’s wise to be prepared for that and include a vacancy rate into any and all calculations.