Real estate investing involves a lot of decision-making and task juggling. While you may need to make decisions on the go and move from one task to the next quickly, there’s one thing that you won’t want to rush: pricing your rental.
Your rental’s price is one of those things that can have a big impact on your returns. The right price can help to draw potential tenants in, and in some cases, help to keep them renting for longer as well, while a price that’s too high can drive people away. Too low, of course, and you could risk leaving money on the table.
Some landlords may price their rentals too low just to get them rented out quickly. Others may go the opposite direction, pricing their rentals too high in an attempt to generate a return on their investment as quickly as possible. But it’s important to find the sweet spot, that price that’s not too high or too low, but just right; perfect for the market conditions, the location, and your property itself.
So, how do you find that sweet price spot? In this article, we’ll take a look at how you can set rental prices that balance profitability and tenant satisfaction.
7 Benefits of Setting the Right Rental Prices
In many ways, your rental price is something that can have a significant impact on your returns. Here are some reasons why setting the right rental price is important.
Pricing your rental correctly may help you to:
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Maintain Positive Cash Flow
Positive cash flow is when the rental income from your property exceeds the operating expenses, such as mortgage payments, property taxes, insurance, maintenance, and property management fees. By setting a rental price that exceeds your expenses, you can ensure that your rental property generates sufficient income to cover costs and leave room for profitability.
Learn more about cash flow here: How Much Cash Flow is Good for a Rental Property?
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Build Equity and Wealth
Most investors have long-term goals around building equity and growing their wealth. And setting the right rental price can help you to achieve this. If you charge the right amount, you can generate a consistent monthly income and pay down the mortgage. Ideally, you’ll also be able to experience long-term appreciation as well. This builds equity, which you can leverage for future investments.
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Minimize Vacancy Periods
Setting the correct rental price ensures your property remains competitive, minimizing vacancy periods. If your rental price is too high, it may deter potential tenants and leave you with a property sitting empty for months on end. On the other hand, if the price is too low, it may raise concerns about the property’s quality or give the impression that something is amiss. An accurate rental price increases the likelihood of securing tenants quickly and reducing vacancies. A property with an appropriate rental price (justified by its amenities and other benefits) may be seen as desirable, and tenants will be more than willing to pay for its unique features.
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Maximize Rental Income
A well-priced property strikes a balance between attracting tenants and ensuring profitability. By conducting thorough market research and considering factors such as property value, location, amenities, and operating expenses, you can set a rental price that will help to optimize your return on investment while allowing you to remain competitive in the market.
See How to Maximize Your Rental’s Profit Potential.
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Potentially Boost Tenant Satisfaction and Retention
Fair rental prices help maintain tenant satisfaction. Tenants may be more likely to renew their leases, which can help to reduce turnover costs.
How to Set the Right Rental Prices for Your Property
So how can you ensure that you price your rental property right?
Here are some tips for pricing your unit:
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Market Research: Understanding Local Rental Trends
Thorough market research is the first step in the price-setting process. First, analyze rental trends in the local area. Look into similar properties on places like Zillow and Trulia and compare their rental rates. This will help you gauge the current market and ensure your price is competitive.
Additionally, keep in mind that the neighborhood can have a significant impact on the price as well, with some areas commanding higher rents than others. Nearby amenities, proximity to public transportation, good schools, and other essential services can also impact the price.
Looking into the average income in the area can also be helpful. In most cases, you’ll want to ensure that your tenants are earning 3X the asking rent, so you’ll want to make sure it’s something that they will be able to afford.
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Assessing Property Value: Evaluating Your Asset’s Worth
To establish a solid foundation for setting rental prices, you should evaluate the value of your property accurately. Location, size, condition, age, and amenities play a significant role in determining its worth. Fortunately, you can ask for an expert’s assistance with this. Consider hiring a professional appraiser to obtain an unbiased assessment of your property’s value.
Remember, an overpriced rental property may drive potential tenants away, while underpricing it could lead to missed revenue opportunities. Aim for a reasonable rental rate that reflects your property’s value in the current market.
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Calculating Operating Expenses: Balancing Costs and Profitability
Next, it’s important to treat your rental like a business venture. Landlords have monthly operating costs that come with real estate investing. Your rental income should be able to cover these and generate a profit as well.
Property rental operating expenses may include:
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Mortgage
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Property tax
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Insurance
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Maintenance and repairs
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Property management fees
While the market sets the rent, not your expenses, running the numbers can help you to assess the viability of your investment. So it’s important to calculate your monthly expenses accurately and allocate a portion of the rental income to cover these costs. Setting aside some funds for unexpected repairs or emergencies is also prudent. You can determine the minimum rental price that’s necessary to maintain positive cash flow by factoring in your expenses.
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Rental Market Dynamics: Supply and Demand
Understanding the dynamics of supply and demand is fundamental when it comes to establishing appropriate rental prices. In a market with high demand and a limited housing supply, landlords can charge higher rents. Conversely, in a saturated market with too many housing options available, you may need to adjust your rental rates to attract tenants.
Stay informed about local market conditions and anticipate any upcoming changes that could impact rental demand. For example, if new businesses are opening nearby or a major employer is relocating to the area, it may increase housing demand, allowing you to adjust your prices accordingly.
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Know What Your Property Offers
What unique amenities or features does your property offer? These could help you to command a better price for your rental.
According to Statista, these are the most popular amenities for renters in 2022 were:
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In-unit laundry (50%)
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On-site pool (48%)
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High-speed broadband (38%)
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Private garage (37%)
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Additional storage (36%)
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On-site gym/exercise space (34%)
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Premium appliances (33%)
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Satellite, cable, or other form of pay TV (33%)
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Online resident portal (28%)
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Playground (27%)
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Rental Price Analysis Tools
In today’s digital era, there’s no need to wildly pick out figures from the air. Online platforms and software applications provide access to vast amounts of data, allowing you to analyze market trends, comparable rents, and vacancy rates in real time.
Leverage these tools to better understand the rental market and make informed decisions about your rental prices. By staying ahead of the curve, you can ensure that your rental rates remain competitive and reflect current conditions.
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Seeking Expert Advice
Setting rental prices can be a complex process, especially if you’re new to the real estate industry. Consider seeking advice from real estate professionals or experienced landlords who have a deep understanding of the local market.
Experts can provide you with valuable insights, best practices, and tips on how to effectively set rental prices that align with your investment goals. They can also help with tenant sourcing and screening, and should be able to go about handling lease enforcement as well. They can also help you to set a rental price that’s a good fit for the market.
Get started right away with our FREE Rental Home Price Analysis.
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Making Adjustments: Responding to Market Fluctuations
Setting rental prices is not a one-time decision. As market conditions change, periodic adjustments may be necessary to remain competitive and maximize returns. Monitor rental market trends, evaluate the performance of your property, and make incremental adjustments to your rental prices when appropriate.
When considering rental increases, consider the impact on your existing tenants. Excessive or frequent increases can lead to tenant turnover, which can be costly and disrupt your cash flow. Find a balance that rewards long-term tenants while reflecting market changes. In most cases, slow but consistent rent increases are best. Just make sure you’re aware of local rent control legislation, if applicable.
After Setting a Price, What’s Next?
You’ve found the right rental price that seems fair to you and your future renters. Here are some tips on what you can do next:
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Find the Right Tenants
Pricing your rental is important, but finding the right occupants is vital as well. Securing qualified tenants reduces the likelihood of rent defaults and can help you to find occupants who will abide by the terms of the lease. Be sure to put an airtight tenant screening process into place to evaluate potential renters’ credit history, employment, and references.
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Highlight Property Features
Is your rental price slightly above market? Your advertising should show why it’s worth the price. Maybe you have a fully-equipped outdoor kitchen and dining area or the latest smart home technology. Whatever it is, make sure to emphasize the unique features and benefits of your property. Consider the amenities, such as in-unit laundry, parking spaces, or pet-friendly policies that set your property apart from others in the area. Highlighting these advantages will enable you to command higher rental rates and attract tenants who value those specific features.
If you’ve recently done renovations or even installed new flooring, you may be able to justify higher rental prices. Renovations and upgrades, such as modern appliances, energy-efficient systems, or stylish finishes, can boost the value of your rental and allow you to set slightly higher rental rates. How much higher, will depend on the local housing market.
Check out our guide on How to Create a Successful Rental Ad.
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Ask for Tenant Feedback
Tenant feedback is a valuable tool for assessing the adequacy of your rental prices. Consider sending out an email survey or short questionnaire, asking your tenants if they are happy with the rental, or if there’s anything they’d like to see done differently, and then see what they say. Honest feedback can provide insights into potential areas for improvement or even opportunities to increase rental prices at some point down the road if tenants feel they are getting a great deal.
Conducting periodic surveys or informal conversations with your tenants can help you gauge their satisfaction levels and identify any concerns they may have. Addressing their feedback and making necessary adjustments can help to boost tenant satisfaction and in some cases, retention, while maintaining a positive experience for all parties involved.
Setting rental prices requires a thoughtful and strategic approach. It doesn’t have to be daunting, especially with the wealth of information, technology, and professional services that are available today. With knowledge, tools, and expertise on your side, you’ll be able to find the sweet spot for your rental, allowing you to maximize the returns on your investment.
Not sure what you should be renting your property for? At Renters Warehouse, we can help. Reach out today for your FREE rental price analysis, and see how much you could be getting for your property.
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