Ever Charge Less than Market Rent?

Question

When I started with my first rental, the person who counseled me suggested asking less than market rent to find the best tenants possible, even seeking a few competing applications. Does anybody think this is a good idea?

Bryan O. · Answer

I've priced my rentals above market. The crappy tenants that are just looking for the cheapest place don't apply. I get the people who are willing to pay more for a nicer place, which means they want to keep it nice because they've made a conscious decision to spend more of their money to have that.

Steve B. · Answer

I always price my rentals slightly below market.  It attracts a larger applicant pool and allows me to be more choosy with whom I select.  It is also worth noting that if you charge above market rent you will often attract tenants that can't be normally be accepted at average rents, in addition  you are more likely to get tenants that will move out faster  if they can easily get a better deal.

Randy E. · Answer

When I first started, I charged below market rent.  I didn't think I could easily afford to have that first property vacant for a couple or three months waiting for a top-of-market price.

Let's say market rent is 675, but I price at 625.  I'm potentially losing $50/month, which works out to $600/yr.  If the house sits empty for even one month waiting for a higher-paying tenant, I've lost $675.  If it sits two empty two months, I lose $1350, and I never get that money back.  Meanwhile at the lower price, I get a dozen views in a couple of days and seven or eight applications.  The house is rented within days and the new tenant pays partial rent for the remainder of the first month immediately even though he isn't moving in until the end of the month, because he doesn't want to lose a well-presented house at a great price.

With the next house, I found myself in a cash crunch and did the same thing, only at a slightly higher price point because the house was larger and better updated.  Again, it worked.  I haven't experienced the extra tenant trouble resulting from lower price points that other landlords here mention.  My tenants stay an average of over 12 months, and almost every tenant has given me adequate notice they planned to move.  Thus, I never have vacant months.  The most a house has sat vacant (unpaid is what I really mean) is a couple of weeks.

I give my tenant's a great, clean place at a great price and I treat them with all the respect in the world.  In return, they pay on time (mostly,) take care of my properties, and mostly all leave a clean house upon moving.  One family even told me they were having money problems after the birth of a child and the loss of a job.  They gave me almost a month's notice they were moving (back in with family) and everything worked out fine.  I think it's all about communication and how a landlord treats his/her tenants.  There are some miscreants out there, but I've found most people respond well to being treated well.

I say it depends on your personal financial situation.  If you can easily absorb a vacant month or two, go for the higher rent.  If two vacant months would present a minor hardship for you, I see nothing wrong with going for the slightly lower price.

I have a new house about to go on the market for the first time.  It's very nicely updated for the area (new everything on the inside and nice updates to most of the exterior.  It really stands out from the rest of the neighborhood.  I plan on putting this one above market rent, but I'm having a hard time convincing myself.  I can now afford to have some vacant no-rent months, but I'm having a hard time pulling the trigger on a top-of-market rent.  Old habits die hard.  ;-)

Good luck!

Steve Vaughan · Answer

I used to target being the cheapest.  What I got was the cheapest tenants.  Folks with the sketchiest history trying to cram as many folks (and pets) as possible into my unit.

The market is so strong here I recently started asking for my "see if anyone will bite" price. The sketchy shade didn't even apply.  I had fewer applicants, but still enough to have multiple folks wanting to apply.  Clean and safe still drew them.

I'm all about offering affordable housing.  I'm still affordable, but with more cashflow and a higher quality applicant pool.  I recommend trying for the high end Account Closed!

Kyle Scholnick · Answer

Only reason I would charge less than market rent would be to avoid hiring a property manager. One of their main purposes is to fill vacancies. But you could save a lot more and avoid paying them 12% per month of your rents, just by lowering the rent a little bit and the renters will come flocking.

Mike H. · Answer

I think on this one you really need to know the context of what the prices are.

There's a big difference in being 750/mo when the market is 700 or being 750 when the market is 800. Versus being at 1300 when the market is at 1400 or vice versa.

Its easier for people to go from 700 to 800 than it is to go from 1300 to 1,400. At some point, it just makes no sense for people to pay that much for rent.

To me, I always try to be just a tad under market. And I always try to rehab a little bit nicer than the rest or than I probably have to. I like to pick out at least 2 things in the house and really upgrade it so it pops. Whether its tiling in the shower, vanity tops, kitchen backsplash - just something that stands out in their minds.

I love opening up walls. Its an added expense that I don't have to do. But why not? It makes the houses appear bigger and it keeps the tenants from wanting to move. Its the one thing that a lot of the competition by me isn't doing so its the one way I can stand out.

The game is all about limiting turnover. And if you're over market, to me, you run the risk of people scraping by deciding they should shop for a cheaper place.  But if you're already at or a tad below market and your place is really nice, where are they going to go? Even if another landlord has listed their house $100 below market. If you're already 25 to 50/mo below, then is it worth it for a tenant to move to save 50/mo?  Probably not.

Moving sucks. :-)

And from a landlord standpoint, its worth foregoing that 50/mo to avoid turnover. Turnover is the enemy. Its the difference between making this investing thing easy or difficult. Low turnover equals low make ready costs. Low turnover also equals less work.

Ultimately, thats how us part time landlords (i.e. those of us with full time jobs) can continue to grow and still manage both. Rehab it right. Rent it right. And you'll make great money with a lot less effort.

Bryan O. · Answer

Hi Steve,

Thanks for the comment. They aren't considerably nicer, just a little nicer. I do charge considerably higher for them. Market for the same size in my neighborhood is around $650-750, but I charge $900-1000. The cheap tenant would never even consider my properties because of the cost per sq. ft., but the ones who don't mind paying more for a better package (in-unit laundry, shared yard rather than just parking, etc.) are the ones that will also maintain things. In my space, no one is doing that and it differentiates me, allowing me to charge above the market. Or you could say that I charge market rents for the market I'm in, only I'm the only one in the market.

Lynn McGeein · Answer

Maybe what they meant was pushing the upper limits or over market rent can get you more applicants that have issues so while they may be willing to pay more to get in, they may not be the best applicants.  There's usually a pretty defined range of market rent for an area, and I will be in the mid-to-high end of that on turnovers, but will actually stay on the lower end with existing tenants because as market rents rise, I don't raise theirs as much as I would ask if I were finding new tenants.  In a slow market, being on the low end or under can help fill a unit if you really need to get it done.  But in a decent or competitive market, it just means leaving money on the table as you would have filled it with decent tenants at average rents.  Do that with several properties, and you can really hurt your bottom line.

Tyson Luthy · Answer

I have found that tenants who are willing to pay the higher prices, are often the better tenants.

I suppose that your question will depend on how strong the rental market is... my rental market is very strong, and I don't ever list properties for under market price.

The only exception is when a lease comes up for renewal. If they have been really good tenants then I keep the rent the same to keep them and avoid turnover.

Even then, I don't let this get too far away from me. If an increase in rent can justify a turnover, then I generally will do it.

Hope this helps!

Joe Fairless · Answer

@sean w. I have below market rent for some of my homes but not because it helps e find the best renters (never actually considered that). I do it so that it keeps my vacancy and turnover low.

Ever Charge Less than Market Rent?

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