Setting rent. A little dilemma...

[Aaron Hale]

Hey All,

I've got a little situation that I could use some input on. We are about to complete renovation on a SFR and are nearly ready to place a tenant. This property is in my hometown and a friend recommended a couple that would be perfect for the place. He inquired about the estimated rent to which I responded that it would possibly be in the range of $1250-1350 with the caveat that we haven't completed our market research for the area for the appropriate rent rates and that it was a very rough estimate.

During the renovation, we came across many ways in which we could make upgrades to further increase the value and the rent potential. After doing our market analysis on comps in the area and speaking to various agents and a couple PMs, we have concluded that $1455 is more accurate for this area.

We just told the prospective tenants of the rent, we are getting, “But we were told $1250...” These  prospective tenants really are the model applicants, a doctor and a lawyer, and would possibly sign on to a 3yr lease. 

This property is a very nice suburban location with great upgrades. It would no doubt fetch what we are asking if we chose to market it to the public, but I’ve also got to consider vacancy, marketing, etc if we don’t place these applicants.

I don’t mind making a small concession to keep them attracted, but would would you recommend to keep them on the hook? Thanks!

[Nathan Gesner]

It was not a formal offer. Tell them you were shooting the breeze and that was your "guess" at the time but further study of the market shows $1,450 is the market price. They can pay it or not.

Which is better:

Tenant A at $1450 a month for one year

Tenant B at $1400 a month for two years

Most people would say Tenant B is the better choice. It's only a slight deduction and the guarantee of uninterrupted rent for two years is much better than a possible vacancy that costs you $1,400 or more. Right? The truth is, many tenants will offer to sign a longer lease just so you'll choose their application over someone else or give them a rent reduction. The vast majority of the time, they'll break that lease before it's over and it will end up costing you more money than if you signed one-year with someone at full price.

Another benefit of the one year? Rent increase every year. If you signed a three-year at $1400 and the market increases 10% in that time frame, you'll lose thousands of dollars.

Another tip? Just because they have professional jobs doesn't mean they are going to make better tenants. Rental markets are hot around the country yet you have a doctor and lawyer complaining about paying market rate for a newly renovated home? And why would two professionals making that kind of money want to lock into a three-year rental when they could easily make enough to buy a home? Even if they had significant student loans, they could still save up for a home within a year. It doesn't add up. I would also be careful because attorneys can make awful tenants. I've rented to many and they almost always end up trying to scare me with legal threats when I refuse to let them out of their lease or charge them late fees.