Top 3 Landlord Mistakes on Charging Rent
Your rent is the blood flow of your business as a landlord. The heartbeat that keeps your business profitable. But it’s also essential to understand how to charge rental rates that keep your business profitable for the long term. I often run into landlords that either try to charge “too much” rent for their given market and more commonly, I see a lot of landlords who undercharge compared to their market. These two landlord mistakes equally stunt your business!
In this article, I’m going to share 3 FATAL landlord mistakes when charging rents.
1. Not Knowing their Comps
This is a typical mistake for most beginner landlords who just get started. Often, landlords will set up an arbitrary amount for their rent and think their property will rent just fine. The problem is that tenants are becoming more savvy and aware of the going rental rates in the area. Rental comps (or rental comparable) is simply assessing what other rental properties are charging for their rate. Taking into in consideration of quality, size, and similarity of the units. Make sure you’re comparing apples to apples. Meaning that you want to compare other properties with similar size, bedroom/bathroom counts, housing type, and unit quality.
Now, one thing I want to highlight is the unit quality part. Suppose your unit has a laminate countertop with standard quality cabinets. In that case, you’ll want to be careful of comparing it to another unit that may have a granite countertop with a set of higher-end cabinets. The unit with the granite countertop can charge more.
Another thing to consider is, will adding a granite countertop be appropriate for the market? If your unit is the only unit with a granite countertop, you’re putting yourself on the higher end of the quality spectrum in the market. In this scenario, you may have a slightly harder time renting your unit since most people expect to rent a unit without one and thus pay less. Think of yourself as the “Nordstrom” in an area where most people would shop at “Dollar Tree”. You’re going to see less demand for your unit because of the market fit and needs.
One of the best ways to get Market Comps is through Rentometer. This is a really simple online software that allows you to look up the average going rate. You don’t have to spend a lot of time comparing when you have a list of similar properties in your area.
2. Overcharging
This has to do with my first point where the landlords don’t quite understand how to run a rental comp. They might be in a situation where their unit is on the top of the quality spectrum. In this case, they’re looking to charge a lot of money for it. The problem is, this unit may not have the demand or able “buyers” that are looking for these types of units.
Now most landlords who typically overcharge are thinking to themselves, ‘"Well, even if I have to wait two months for me to get a tenant, I’ll do it at this rate."
The problem is that this landlord missed out on two months of rent. It may often only be a difference of $20, $30, $50, or even $100 in terms of how much they’re overcharging. In this case, the landlord is missing out on two full rent payments for the difference of such a small amount.
The difference of $25 that you’re overcharging, costs you more than the rent amount you could be collecting.
3. Undercharging
Undercharging is one of the landlord mistakes I see a lot. This is not $25 or $50 less than the market rate - but instead $100 or more dollars of difference. Suppose the going rate for a given area is $1000 a month. In that case, a landlord who charges less than $900 is doing a disservice to themselves. But also to other landlords who may be relying on this particular unit as part of their comparables.
Also, I’ve personally experienced that by undercharging, you can often attract the wrong type of tenants (not always). And attracting the wrong type of tenants can also have costly consequences (i.e., headaches, on-going pain of problems, etc.)
My best tip and advice is to increase the rent in a small increment until you can hit an appropriate rate based on the market rent comp. Another opportune time is when you have a tenant turnover. If the market rate is $1000, but you’re currently charging $900, you can always change the rent to $975 or $1000 once the tenant leaves and you’re expecting to fill the vacancy with a new tenant.
Summary
Avoid landlord mistakes if you want to keep your landlord / rental business in top-notch shape. It’s critical to have a strong pricing strategy for your rent as your cash flow, profitability, and value of the property could be driven by how well you price your rate. It’s the root of all benefits and problems of the business!
The following blog post was contributed by Sam Kwak, real estate investor, and CEO of FlowMatiks. Get more of Sam’s knowledge and insightful real estate content at the Kwak Brothers YouTube channel.