How to Set the Rent Price for Your Rental Property
As the owner of a rental property, your goal is to maximize the amount of profit that you receive from your single-family home, condo or multi-family building.
The rent that you collect from tenants pays your mortgage, taxes (ugh!), insurance, maintenance and building your reserve fund for bigger repairs. In the end, after paying all of the expenses associated with the property, you hope to have money left over to compensate you for your time and to save for that next rental unit that you want to buy – your profit.
On the flip side, tenants want to pay the lowest amount possible and have lots of options of available properties to rent.
This contrasting dynamic creates a lot of confusion and oftentimes leaving landlords wondering, “How in the world do I set the right rent price for my rental unit?”
Since co-founding Rentalutions in 2013, I have worked with thousands of landlords from all across the United States. The question of pricing comes up all the time, and I have developed several tips for nailing the pricing equation to maximize your profit.
Timing is Critical
In real estate, it’s often said that the three most important things are location, location, location. To be an efficient and profitable landlord, I’d argue that the three most important things are time, time, time and here’s why:
Seasonality (time of year) impacts rent prices
Rent prices are largely dependent on how much demand there is for rental properties in your area.
Across the country, demand for rental properties is highest in the summer months. Demand peaks in the summer months because people dread moving in the middle of winter, especially in northern states where moving in winter entails hauling furniture through snow drifts in sub-zero temperatures. The second reason that demand is higher in the summer is that families don’t want to disrupt their children’s schooling.
Just like demand for rental properties is highest in the summer, rental prices tend to be higher in the summer months. If you are looking for tenants in the summer, you’ll probably be able to get tenants to agree to a higher rent amount than you would in the winter.
By keeping this in mind, you should try to ensure that any new leases you enter into expire in the summer months. If your property currently has a winter expiration, you may want to negotiate a three to six-month extension with the tenants to get on a summer vacancy cycle. If this doesn’t work, you may want to make your next lease 15 or 18 months long to ensure that your next vacancy falls in a high-demand season next time.
Days to Vacant
One surefire way to lose money on your rental property is to have the property sit vacant. Having a property sit vacant is so painful that you want to always know the Days to Vacant for your property. This metric is actually as simple as it sounds: a count of the number of days until the rental property is vacant.
The lower your Days to Vacant becomes, meaning the closer you are to having a vacant unit, the more desperate you’ll become and you’ll likely be willing to accept a lower rent.
To avoid a vacancy and to maintain strength in negotiating with tenants, be sure to start the lease renewal and tenant search process as early as possible.
You should always contact your existing tenants 90 days before the existing lease expires to begin the renewal conversations. If the existing tenants decide not to renew the lease, you’ll be able to start showing the unit to new prospective tenants 60 days before the existing lease expires (in most situations).
By starting the renewal and tenant search processes early, you’ll give yourself ample time to advertise your property and find great tenants. For tips on how to find stellar tenants, read this.
Starting the tenant search process early will help you avoid stress, but it also allows you to start with a high asking rent price. If you don’t receive as many leads as you need to find a qualified tenant, you can always lower the rent amount. Starting early gives you the time to gradually lower the rent, if necessary.
Maximizing Rent IS NOT the Goal
Your goal as a landlord is to maximize the profit earned from your rental. Maximizing profit, though, doesn’t always mean agreeing to the highest rent price with your tenants.
To maximize your profit, you need to find tenants who will pay rent on time and will take care of your property.
Sure, you may be able to get a signed lease with a higher rent from a bad tenant, but it’s not worth it. Sacrificing a bit on the rent amount to get good tenants will pay off in the long run. These good tenants won’t cause headaches for you and won’t cause disturbances for your neighbors.
To learn more about screening tenants and picking the right tenants to rent to, check out our 5 part guide to tenant screening.
Setting the Rent
Now that we know the implications of timing on the rental market and the importance of finding quality tenants, let’s talk about the specifics of setting the rent for your home.
To understand how much your rental property will fetch in monthly rent, I recommend you spend time studying comparable units that are on the market. You’ll want to be sure you’re looking at units of similar size, with similar features in your specific area.
Limiting your research to properties in your local market is important because prices can vary dramatically based on location. A single family home in Anchorage, Alaska doesn’t rent for the same amount as the same home in Austin, Texas. Even within cities, the rent prices for the same size and type of unit can vary wildly.
Even if you can’t find a long list of identical properties, studying other properties on the market is the best place to start. After developing your list of comps, or comparable units, you can make adjustments for differences between the comp and your unit. For example, perhaps your home includes a washer and dryer, but none of the comparables do. If the comparables are renting for $1,200 per month, your unit with the washer and dryer should command a higher rent.
To find comps, you can use any of the online rental sites, such as Hotpads, to find units in your area that are for rent.
Several websites, including ours, are developing algorithms to estimate the rent prices for various properties. The most established of these estimates is Zillow’s Rent Zestimate.
As I touched on earlier, the rental market is subject to the economic principles of supply and demand. As the seller of a product (housing), the more demand that you create for your property, the higher the rent you’ll be able to demand for the property.
To create demand for your property, you can certainly lower the asking rent amount, but this is opposite your goal of maximizing profit from your unit. So what else can you do? Well, you have plenty of tools for increasing demand.
For starters, be sure to advertise your rental property everywhere that interested tenants may find it. I’m biased, but I recommend our automated rental listings feature. The average landlord who uses this part of Rentalutions receives 15-20 leads per vacant unit.
Another tip for creating demand is to create a sense of urgency amongst interested tenants. You can do this by scheduling multiple showings of the unit at the same time. When multiple tenants show up to see your unit at the same time, they’ll feel like they are competing for your unit. This increased demand will encourage interested tenants to act quickly and to pay the asking rent amount.
The Price-Value Relationship
The amount of rent that good tenants are willing to pay for your rental property is largely a result of the value that these tenants believe they’re receiving.
One way to increase the rent that you receive from tenants is by increasing the value that you deliver. Landlords are oftentimes able to increase their profit by increasing rent more than the cost of value they’re delivering. Here are three potential ways to increase profit by delivering more value:
As a landlord, you have an unfair advantage of knowing the historical utility costs for your unit. If the average cost of utilities per month has been $120, you might be able to increase the rent by $150 per month by including the utilities in the monthly rent. Your profit just increased by $30/month!
Tip: If you decide to do this, be sure to clearly outline what utilities are included in the lease agreement. You’ll also want to clearly outline any restrictions on how the utilities can be used.
Tenants prefer living in nice places with new appliances. As a landlord, you may be able to increase your profit by investing in, and upgrading, your rental unit. I spoke with a landlord recently who was able to increase his monthly rent $50/month by installing a brand new stainless steel refrigerator that cost him $800 at Home Depot.
Depending on the type of rental property you own and the demand in your area, you may find it advantageous to rent your property fully furnished. There are companies that rent furniture, or you can invest in buying low-cost furniture from a retailer like IKEA. Because furnishing a property can be quite costly, you’ll want to carefully analyze this option.
There are many more ways to increase the profit from your property by delivering greater value. It is widely documented that consumers–all of us–oftentimes make irrational decisions about price and value.
The Importance of Emotion
It shouldn’t be a surprise to anyone that one of the biggest factors in tenants’ decisions of which property to rent is their emotions about the property. As a landlord, understanding the role of emotion on tenants’ decisions can help you increase the price and profit from your rental.
To increase rent and profit, you’ll want to ensure that you are marketing your property in the best way possible. You’ll want to ensure that you have great pictures of the property. You’ll also want to be sure you have a well-written description that attracts mobs of great tenants.
Finally, you’ll want to highlight that you’re an easy landlord to work with. Just like landlords fear renting to nightmare tenants, tenants are oftentimes worried about renting from a landlord who is tough to work with. Welcome your tenants into their new rental property with these 8 tips.
Tenants also want to do things digitally these days, including pay rent online. To save time, and to make things easy for tenants, consider using our property management software.
Diamonds are Forever, Rent Isn’t
One final thing to keep in mind regarding setting rent is that the amount isn’t set in stone, and can be adjusted over time.
To maximize the profit from your rental, you should re-evaluate your rent price at every lease expiration. While the topic warrants its own post (coming soon!), your goal should be to increase the rent as much as possible over time without creating tenant turnover (turnover costs time and money).
At Rentalutions, we aim to help DIY landlords save time managing their rental properties. We do this by building beautifully designed software that automates the rental cycle.
In addition to building amazing landlord software, we have an outstanding customer support team that interacts with hundreds of landlords every day. If you have any questions or thoughts on this article, please drop me a note to firstname.lastname@example.org.