How Should You Price Your Rental Property?
Pricing your rental property can be a tricky subject to wrap your head around. How much is too much? How much is too little? Where’s the sweet spot? Price point is one of the most important aspects for a landlord to keep in mind, as it directly correlates to the quality of tenant you will attract, the amount of applicants you’ll receive, how quickly you’ll attract them, and how much of a return you’ll make on your investment. Here are a few key strategies and points to keep in mind when deciding on a monthly price point.
Upgrades, Upgrades, Upgrades!
Costly upgrades will justify a slightly higher price point than other rental units in your neighborhood. How desirable the unit is will directly correlate to how much you can charge. Costly kitchen upgrades, bathroom upgrades, nice flooring, beautiful windows etc, will all attract quality clients; the kind of client that values their living space, and will respect your property. While price point is typically the deciding factor in the mind of a tenant, a good tenant will be willing to pay a little extra for a nicer living space. With that said, you have to be careful when you price above the neighborhood norm. Over pricing will backfire and leave you with an empty unit. For example, if you see similarly sized units in the neighborhood that are older and less desirable than yours going for around $1200 monthly, you can comfortably ask for $1300-$1450. The tenants that you want will see the value. However, once we start getting into the range of $300, $400, $500 more per month, potential tenants will start to think that the increased cost isn’t justified. By over pricing, you’ll be left with an empty unit. Every month with an empty unit is money lost. This brings me to my next point:
How Much You’ve Invested in the Property Doesn’t Matter!
Ok, so I’m sounding a little contradictory here. My point is this: the rental market is not concerned with your costs; they are concerned with finding a nice living space that is affordable. Renters are renting for a reason. They either can’t afford yet to buy, or are simply looking for a temporary space. In either scenario, the potential prospect will have a cut off in their mind when it comes to how much they are willing to spend. So, while investing money in upgrades will certainly attract a stronger quality of tenant and allow for a slight price increase, you have to remember that the renter doesn’t care how much money you’ve invested in the space. They care that it’s affordable, convenient, and livable. More importantly, remember that those upgrades will justify a higher resale value. There is no need to get greedy on the monthly pricing as when it’s time to sell, those upgrades will yield a strong return.
Don’t Underprice Your Property:
Are you seeing a pattern of contradiction yet? On the one hand, I’m suggesting not to overprice your property. On the other hand, I’m suggesting that upgrades will justify a slight increase. And now, I’m saying not to underprice. The point to take home is here is this: It’s a fine line, and there’s a “right” price point. By underpricing your property, you’ll be left with an overabundance of applications, and the majority will be poor quality tenants. You’re in this to make money, not to undercut your biggest investment. Having a wealth of application forms from poor quality tenants will be nothing more than an unnecessary headache; it will take a ton of time to sift through the applications, and the majority of them won’t be worth your time. Can you imagine going through this process for every poor quality tenant applying for cheap rent? More importantly, you run the risk of losing out on the good tenants who have applied; by the time you get to their application, they may well have moved on. Underpricing to create a bidding war is not worth the trouble. On the flip side, overpricing in hopes to create wiggle room to negotiate also has a strong potential to backfire; you’ll be left with minimal applications and long vacancies.
So Where’s the Sweet Spot?
Monitor the price points of other units in your area. Compare the units to yours. Which units in the area seem to be filling up the fastest? Check out local classifieds, visit properties, and understand your competition. Generally speaking, units on higher floors, with good window viewpoints, bigger square footage, good storage space with balconies etc can be priced a little higher then otherwise. Compare your unit, and if you have one of the better ones, put a slightly higher price point than what you’re seeing. Be honest with yourself in terms of how your property compares when deciding how much higher you’ll price it.
Listen to the market, and it will tell you how to price your rental property.