Philosophy on setting rental rates

[Julie Kern]

We will be listing our first rental property in the next week or so.  I've spoken with two different PM's who have very different philosophies on setting rents.  

One says to stay away from the high end of the rent range.  Her thought process is that if you get the max rent and renters don't feel that they've gotten a good value, they'll "create value" in some other way  - namely more maintenance calls translating to higher expenses.  But if a tenant feels that they've gotten a good deal, they'll be low maintenance and more likely to stay longer term. This PM also doesn't believe in raising rent if you have a good tenant.  

The other PM suggests setting the initial rent above the high end of the range, and then gradually lowering it to hit the "sweet spot". 

I can see where both philosophies have merit, but I'm curious to know what others on BP think?  

[Nate Garrett]

Owners commonly ask the question “What’s the highest rent that my property can get?” It seems logical that extracting the highest rental price from your investment property will lead to the most income.

We think the question that you should be asking yourself is:

“What is the highest rental price that will still attract a sizeable pool of prospective tenants while encouraging the eventual tenant to stay multiple years?”

Vacancies are the number one rate of return killer on investment properties. A typical vacancy period costs an investor several thousand dollars in lost rental income, mortgage payments, touch up painting, yard maintenance, utilities, etc.

Your goal should be setting a rental rate that is in line with market rents but encourages the tenant to stay for multiple years in order to minimize vacancies.

Our philosophy is to set the rents ever so slightly below market rents. Why?

Setting rent even $25 per month below market rent is a powerful incentive for tenants to renew leases at the end of the term. We also believe tenants are more inclined to take good care of the property when they feel like they’re being treated fairly. $25 per month is money well spent to avoid a several thousand dollar vacancy.

What about automatic rent increases in the lease?

Many leases include a clause that raises rent by 5% or so if the tenant decides to renew after the initial term. Do you like it when prices go up on a monthly bill for no good reason? Neither do we. We think automatic rent increases in leases are a bad idea. What if local market rents go down? The tenant will shop around at the end of the lease, and when he or she discovers that their rent is about to be $75 / mo higher than other similar properties, they will probably move.

Our philosophy is to raise rents only when there is a good reason to do so: when market rents in the area have increased significantly. If you do decide to raise the rents on an existing tenant, only raise it enough to bring it near current market rent and have comparable rental data available to show the tenant that you are treating them fairly.

Like any other business, provide value for your customer (tenants) and your business will prosper. Your pocketbook will thank you in the long run.