Effective Rental Unit Pricing Techniques

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A recent Harvard study confirmed what everyone already knew: rental units (especially single-family homes) are in high demand and that demand continues to grow.

As rents increase, so does the number of first-time landlords, as more people find rental investing an attractive way to supplement their income. But how do new landlords determine the right rent amount?

Pricing your rent just right is both an art and a science, requiring research, an eye for details and possibly the use of a formula long known to industry pros. As real estate investors learn their markets better, their eye for both what to charge and what extra touches might be added to boost rents higher.

Traditional Formula– Novice landlords should start here, since they have yet to learn the local rental market inside and out, nor have an eye for what hooks tenants’ hearts and can command higher-than-average rents. The formula is simple and is based on a percentage of the cost of the home. The formula is based on a range of approximately .8% – 1.1%; the higher the home price, the smaller the percentage. The formula looks like this:

$65,000 condo = $65,000 x 1.1% = $715

This would be just a starting point as there are other things to consider. In the example above, if every unit in the apartment complex is renting at $695, unless the landlord has something extraordinary to offer, $715 is too high regardless of the formula.

Know the Market Intimately– No formula can substitute for common sense and research on what the market will bear. Veteran landlords have a sixth sense for where their rentals should be priced, based on years of experience and market acuity. Currently, the rental market is booming and rents are on the rise because demand outweighs supply, which veteran landlords would have a good pulse on and will know how to adjust accordingly.

Start with online resources such as Rentmetrics.com and Zillow to get a rough idea of market rent, then start browsing actual rental listings on sites like Craigslist. But knowing what other landlords in your area are charging is not enough; you need to know exactly how their rental units compare to yours. A good exercise is walking through 4-5 similar rental properties available for rent, and really putting yourself in the shoes of a prospective tenant – what amenities are important to you? What safety concerns do you have? Consider parking, washer-dryers, central air conditioning, layout, bedroom size, closet size, bathroom elegance, appliance modernity and start to grasp the “glamour” factor and how much impact it has on rents in your particular neighborhood.

What is the most desirable section of the neighborhood, and how quickly do rents drop as you get further away?

What kind of people do you want in the property? Without discriminating, you can add or emphasize amenities that particularly appeal to young professionals, or to families, or to empty nesters, etc.

Pricing too high will still result in your property remaining on the market for a long time. Pricing too low will attract lower quality applicants, but pricing just right will not only guarantee you rent the home quickly, but it will also help secure a longer-term tenant which means a lower vacancy rate (and therefore higher ROI).

Perform A Test Run – If you think your rent should be higher than market for some reason, do a test run at the price you want for about a week to ten days. Doing so will help determine how people feel about what you’re offering – the price and the product compared to the competition. If your phone rings off the hook, then you’ll know your price is probably on the low side. If you receive no responses, you’ll know your price is too high. Also, once you receive the phone calls and actually make appointments to show the property, frequent cancellations may mean your competitors are priced better than you, or that your property lacks curb appeal. Lastly, if you do show to a number of prospects, but receive no applications, consider the interior of the property and what might be done to improve it, or lowering the rent.

Sometimes people are willing to pay a little more than they have to for a good product, especially if the home is superior to that of the competition. Remember the old adage that people make decisions based on emotion, then justify them with logic, so hook them with glamorous touches that just begged to be shown off to the envy of friends, and then outline for them all the logical justifications for why the property is a stellar, convenient, cost-effective place to live.

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