October 17, 2016
Tagged in: Setting Rent Prices

Becoming a landlord involves a whole series of decisions to be made, such as: What area to invest in property and what kind of loan to take, among others. One decision many landlords don’t take enough time to consider is the rate at which to set their rent.

Typically, people look at other rentals currently on offer, make a quick comparison with the number of bedrooms, check the amount that would cover the loan repayment and bam!, that is the rate.

If this sounds like you, then please read on … there is far more to setting rental rates than this, and you could, ultimately, make significantly more profit in the long term.

Too High - Too Low

Setting the rate for rental is tricky. As the landlord, you want it to be high enough to make yourself money, but not too high to push people away from your property. Profit is often the main factor motivating landlords, and, of course, on the flip side, tenants want to pay the lowest rate that they can. However, when this is coupled with the fact tenants are often inundated with choice in the market, it becomes clear that landlords need to think carefully how to attract people to their property without losing money every month.

In addition, it’s unfortunate if a property sits on the rental market for too long because of a rental rate that is out of sync with the market. If a tenant doesn’t move in within the first few weeks, it can be perceived as undesirable, and interest in your property will wane with no valid reason. Take a look at what Louis Christopher told The Property Observer.

SQM Research director Louis Christopher says properties that have been on the market too long often develop a "stigma" that is often unwarranted. He says properties that make SQM's Top 10 Most Discounted Properties list are often high-quality homes that were overpriced at the outset of their marketing.

"Unfortunately in some cases, the main factor determining lack of sale initially was an overinflated asking price rather than any issues pertaining to quality," Christopher says.

It is, therefore, ideal to set the price right from the outset to avoid this kind of scenario.

Consider Your Costs

Before you start looking at the market, it’s important to identify your bottom line. Calculate the “outgoings” of your rental business. What is the cost of the mortgage, taxes, insurance, maintenance and savings? Once you have this figure, you will know how low you can possibly consider placing your rate. Be aware that landlords insurance is typically more expensive than homeowner’s too, as The Truth About Insurance explains below:

Insurance companies pour over existing claims data from previous years and continually adjust their pricing to find a balance between charging too little and not making a profit, versus charging too much and losing business to competitors.

We’ll spare you the finer details, but as it turns out, rental properties have a higher statistical frequency and severity of claims than primary residences. Therefore, they are more expensive to insure. Period.

Timing Is Crucial

A little known fact that can make or break the profitability of your business is the time of year that your rental property is put on the market. Demand for rentals changes with the seasons and this is more marked in some regions than others.

In general, demand for rental property is the highest in the summer. Most people try to avoid disrupting their children’s schooling, and, therefore, wait for the break in school year to move residences. In addition, people are generally reluctant to pack everything and make big changes during the winter, preferring to stay inside and warm.

Being aware of this trend and working with the changes in demand will affect your ability to place your rent higher than you could if you tried to put it on the market in the winter. In the summer, there will be more potential tenants looking for property.

Knowing this, also be sure to write renewal dates for tenancy agreements that fall in the summer. This will hopefully reduce the number of days your property is vacant, if your tenant chooses to leave at the end of their lease, in the summer.

Look Beyond Number of Bedrooms

When looking at other rental properties on the market, don’t compare based solely on the number of bedrooms they contain versus those in your own unit. The desirability of a rental unit is based on more than just that factor alone. Tenants appreciate other aspects as well, and, in some cases, these can motivate them to choose a unit with a different number of bedrooms than they had originally wanted. Consider other saleable features of your property such as:

  • View

  • Recent updates to fittings

  • Square footage

  • Layout

  • Floor level (in apartment blocks)

  • Whether there is a lift

  • Particularly generous closet space

  • Balcony

  • Windows

In addition, if your unit has undesirable features, be aware of these also. Take them into account when setting your rental rate.

Keep an Eye on the Market

When you’re able to compare your unit objectively with others on the market, it places you in a position to watch the trends of similar properties. You should aim to price your rental unit competitively amongst others currently available.

Watch the changes in rental rates in papers and advertisements online to see how the market changes. If you see landlords offering large incentives, then it may be the market is saturated; therefore, not a great time to put your property on the market.

What to Include in Rent

Another factor to consider when setting rental amounts, is what should be included with the rent. Will you simply offer an unfurnished unit, with no additional extras? Or will you decide to include small kitchen appliances or furniture?

Each of these options will impact the final amount you can charge. You will have to decide whether the balance of risk is worth the additional income. For instance, if furniture is damaged or utility bills run high, then you may end up running a loss.

The Value of a Great Tenant

Remember also, that profit is not maximized simply by receiving the highest possible rental fee. Finding a great tenant who takes care of your investment property and always pays rent on time will save you a fortune in the long term, compared with being forced to evict a bad tenant or having to pay expensive repair costs. When landlords take this into account, it becomes clear that overall profit is based on more than just monthly rent.

Stand Out in the Crowd

When deciding on the rental rate to charge, you’d probably do well to price your unit in the more expensive half of the price bracket that is currently on the market. This will ensure you don’t simply attract the tenants with financial struggles, looking for the least expensive property they can find.

It is possible to stand out even in a busy rental market, preventing the scenario where your unit stands vacant for too long, by marketing well. Organize professional photographs and write a compelling description for your advertisements.

Hit the market hard, advertising across as many platforms as you can in order to reach as many potential tenants as possible. If absolutely necessary, you can increase interest by offering incentives and special offers with expiration dates.

Summary

It’s clear from reading this blog that setting the rental rate is a decision that should be considered carefully. It’s imperative that the rate is not set too high, putting off potential tenants and leaving the unit sitting on the market for too long. Once your monthly costs have been taken into account, you can identify your bottom line amount.

Taking an objective look at your rental property, beyond simply the number of bedrooms can help you to make accurate comparisons with other units on the market. Take account of any features that are particularly desirable, such as a fantastic view, generous closet space or a balcony, and make sure that these are reflected in your rate.

Remember the time of year you put your property on the market will also have a huge impact on the rate you can charge. People are more willing to move in the summer, so if you’re trying to find a tenant in the winter, be aware that your rate may need to be lower than you had hoped.

Try to ensure your rental fee is competitive compared to other comparable units, and be clear about exactly what you are including in that price. Are you offering your property furnished or unfurnished, for example?

Always remember that profit goes beyond rent alone, as a great tenant can save you a fortune over time, even if the rental amount is slightly lower than the market rate. Whatever amount you choose to set as your fee, be sure to market your property well, as great photographs and compelling sales copy can go a long way in attracting tenants.

This article was conbrutied exclusively for Rentometer by LandlordStation.com