In an ideal world, the right rent for your property would be the amount that would make you the most money. Unfortunately, in the actual world of competitive real estate, tenants have the freedom to choose from many different apartments, so you have to set your rent accordingly.
Your goal is to set the rent at the highest point you can to attract tenants, cover your expenses and hopefully put some money in your pocket, but not so high that you have to deal with vacancy costs from not being able to find a tenant quickly.
1. The Right Rent Is Based on the Desirability of the Unit
Do not set a standard price for all one bedrooms, or set a standard difference in price between one bedrooms and two bedrooms. Unless the units are exactly identical, this strategy will hurt you in the end. You should charge slightly different rents based on the desirability of the unit.
You have a house with two one bedroom units for rent. One unit is on the ground level and the other unit is on the second floor. The units are identical except for the fact that they are on different floors and the unit on the second floor has an extra storage closet.
You may think that setting the same rental price for both units would make sense, but this is not the case. Prospective tenants who see both units will jump on the second floor unit with the extra closet because they think they are getting more for their money comparatively. Once the other prospective tenants learn the “good unit” is taken, they will likely search for apartments elsewhere because they now feel the ground floor unit is overpriced. Charging an extra five to ten dollars a month for the second floor unit would be reasonable.
Set the Rent Based On:
- View- apartments with a garden view are more desirable than those with a view of the parking lot.
- Updates-units with updated appliances, hardwood floors or other amenities are more desirable than those without.
- Square Footage- a 1,000 square foot one bedroom is more desirable than a 700 square foot one bedroom.
- Layout- railroad style apartments are less desirable than other layouts.
- Floor Level- higher floors are more desirable. The exception is a walk up, where after the third floor, you will have to start lowering the price because people will not want to go up and down all of the stairs.
- An extra closet, balcony or window makes a unit more desirable.
2. The Right Rent Is on Par With the Competition
Check out local newspapers and online ads for apartments in your area that are similar to yours. This will give you an idea of the going rent in your area. Do this for a couple of weeks. Keep track of which apartments are getting rented quickly, which apartments have lowered their rent and which ones have been listed for many weeks.
If you see several landlords in your market offering rental incentives to attract tenants, such as a free TV, it may mean that your area is over-saturated with rentals and you may not be able to command the rent you had hoped.
You may even want to go check out some of the apartments in person and compare them to your unit. Ask the landlord if there is a lot of interest in the property. You should also talk to realtors or other landlords in your area to see what they think a fair price for your unit is. Once you have looked at these factors, you can adjust your rent accordingly.
3. The Right Rent Will Attract Tenants
Has anyone come to look at your property? If not, the price of your rental may be to blame. If your rent is set too high, or too low, prospective tenants will steer clear.
Although people often equate a higher price with status, if your apartment does not have the location or amenities to back up the higher price tag, prospective tenants will have no desire to see your property. If your rental is priced too low for the area, believe it or not, people will not come because they may think something is wrong with your property. To succeed as a landlord, you will need to find the perfect price point.
You will not just set a one-time price for your rental and then forget about it. You must constantly look at the market and adjust the rent based on demand.
For example, when the economy is bad, the demand for rentals can go up because people can no longer afford their homes and are forced to rent instead. A bad economy can also cause a greater demand for smaller, cheaper apartments because people have to downsize. Another example is, in the summer, the demand for larger apartments may be greater because families are trying to move before the school year starts.
The basic rule of thumb is, when there is greater demand for your particular unit, you can charge a higher rent. When there is less demand, you may have to lower the rent to attract tenants.
5. The Right Rent Leads to Profits
Everyone has a different goal when owning property. Regardless of your desire, the right rent should, at a minimum, be enough to cover all your expenses for the property. The rent should cover your PITI mortgage payment (if you have one), maintenance and repairs on the property and vacancy costs. In addition to this, landlords may be able to put, on average, zero to six percent of the rent in their pocket each month as a profit.
Keep in mind that many property owners, especially those with large mortgages or construction loans, do not see an actual profit until they sell their property or until they have owned the property long term. Regardless, if the unit is not benefitting you in some way each month (paying down your mortgage, reaping tax benefits, putting money directly in your pocket), you have not set the right rent, or worse yet, you have overinvested in the property.