Setting prices is one of the biggest challenges for many business owners—and landlords are no different in that regard. Fortunately, you can take the guesswork out of pricing your rental property by considering five factors:
- Market demand
“If you know the market where you’re renting a property—which you should if you’ve purchased investment property there—as well as your monthly expenses for that unit, you should be able to price rental units accurately out of the gate,” advises Steven Davis, 5 Arch Funding Chief Information Officer (CIO) and Chief Financial Officer (CFO).
Do the Math
The point of a rental property is to turn a profit, which means the rental price must exceed your expenses, including the cost of the mortgage and taxes, upkeep, payments to a property manager, and utilities (if they aren’t included). That’s basic math, and most investors understand this.
What often trips up seasoned investors are those rental costs that are not typically recurring—things like unexpected repairs, marketing and advertising costs, legal and accounting fees, and any other expenses associated with the business. “Take these average monthly costs over time, split them between your rental units, and add that amount to the cost of each unit,” says Davis. Then factor in the monthly profit you hope to make after income taxes, and that would be your ideal rental price.
Assess Rentals in the Area
Regardless of your calculations, the rental price should not exceed the cost of similar properties in the area, or you’ll be left with a vacancy. “It is better to rent a property at a smaller profit, or even take a temporary loss, than to have an empty unit,” Davis points out. After all, empty rentals are a security risk, a financial loss, and can even drive down overall property values in the neighborhood—the exact opposite of what an investor hopes to achieve.
“If you have done your homework before you purchased the unit, you should be able to turn a nice profit by pricing your rental close to the median of similar rentals in the area,” says Davis.
Location, Location, Location
Within a neighborhood location counts. Homes closer to schools, parks, shopping, and public transportation—especially in walkable communities—command a higher rental price than those on the outskirts.
When an apartment has a great location and is stocked with amenities, you may be able to charge more than the median price in the area, or even more than market value.
Some aspects that make a home or apartment more desirable:
- Tons of closet space
- A beautiful view
- A doorman
- Security systems
- Home automation systems / smart home features
- Onsite pool, fitness center, community / party room, laundry room
- Value-added services such as landscaping or housecleaning
Marketing: The Art and Science of Real Estate Rentals
If pricing rentals were as easy as expenses + profit, anyone could make money as a landlord. But renting an apartment is as much art as science. When you apply solid marketing strategies and home staging to make an apartment more appealing, you may find a higher priced unit will move quickly. “It’s all about perceived value,” says Davis.
“And don’t worry if it takes some trial and error to price a rental home or apartment. That means you’ve learned something important. Filing that information will make it easier to price your next rental right,” he concludes.
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