Determining the right price for renters can be a challenging task, and is something I consider more of an art than a science. Rent trends across the United States fluctuate every year depending on the economy and rental markets. In 2018 , in 29 states rent went up, whereas rent decreased in 22 states and remained the same in just one.
Many factors can and should go into determining the right price for you and your renters — ultimately, getting the best return on investment (ROI) is the goal, and sometimes this might mean securing an amazing long-term renter at a lower rent price. The return might not be as good from the get-go, however, long-term renters have great potential value because the cost of renter turnover can be high, especially if it is more frequent. Here are some methods to determine the optimal rent price along with pros and cons for different situations.
How To Determine The Right Rent Price
Filling vacancies can be a somewhat stressful thing for landlords, especially if you have already put in a lot of time and money into your property. Therefore, choosing the best rent price is important to make sure you’re profitable while also attracting great tenants. If you price your rental too high, you could potentially have extended vacancies; if you price it too low, the strength of the investment weakens. So then, how should you determine the price of your rental? There are a variety of professional rent comparison reports you can purchase that will help you learn more about the area and will save you time, but here are some of the more traditional ways to set rent. Combining all methods will likely garner the best results.
1. Market rate formula: This is a traditional and straightforward method where you take the value of your home and charge between 0.8% and 1.1% of the home’s value. However, you will want to take the housing market in your location into consideration as well.
2. Compare rent prices in your area: Comparing prices combined with the market rate formula is an ideal option to determine your own. Looking at different listing sites with similar layouts to your property will be an excellent indication to see if you are in the right ballpark. For example, the number of bathrooms and bedrooms, pet policies, amenities, parking, age and appliances are all assets you need to consider when looking at other properties. If yours includes better amenities or is bigger, then you should adjust the price of rent accordingly.
3. Free tools for rent estimates: Sites such as City-Data.com and HUD.gov are helpful in providing rental data and education about your local markets. Doing basic research about the rental market in your town and state will educate you about the process and help you determine your rent prices. If anyone questions your pricing, you will have data to back up your decision.
Pros And Cons To Lowering Rent Price
One of the main, and most important, reasons landlords may choose to lower their rent price compared to other properties in the area is to secure a long-term renter. But, there are both pros and cons to securing a long time tenant:
Pros
• You only have to go through the process of marketing, showing and screening your property once every year or a couple of years.
• You can find a great renter who will want to stay if you lower the price. This is guaranteed rent for however long you both decide.
Cons
• If you start with a lower rent price, you might not find someone who is being truthful about wanting to live there for a long time, or something could come up where they have to move.
• You won’t be getting as much cash flow initially as opposed to a higher rent from the start — the ROI would be a slower process.
• It’s hard to raise the rent substantially after lease signing as state laws determine some of those percentages. Check your local regulations to learn more about permitted price increases.
How To Determine Long-Term Value Of A Renter
Deciding if your renter would bring long-term value can fit into the rental price determination with many variables such as location and age. For example, a college student wouldn’t be considered a long-term renter — they tend to only live somewhere for a short period of time. On the flip side, a family might bring greater long-term value because they likely are trying to establish roots, and renting can be much more affordable than buying a house in many places across the United States.
If you are unsure if your rent prices are giving you the best ROI based off of your current rent, risks and other additional costs, consult an income calculator to determine how much you’re making from your rental property. Regardless of if you’re a new landlord or an experienced one, keeping up with market trends and setting the right price for your rental, whether you do it strategically to gain a long-term renter or not, is vital to make sure you are getting the most out of your rental property.