Understanding the appropriate pricing for your rental property...

We recently had a client ask us if we were confident that we could place a new tenant at a rate that they had received three years ago. The amount they were asking for was 11% higher than what the current tenants were paying. 

To answer this question of pricing and confidence, we had to review the overall “health” of the property.

A couple of quick lessons to observe from this situation:

Lesson 1: 

Just because your home leased previously for a certain amount, does not mean that it will lease at that same rate in today’s market.

Lesson 2:

The costs associated with turnover and vacancy can easily wipe out almost any rate increase.

Lesson 3:

DO NOT ignore your properties marketing/leasing history.

What to learn from the lessons above:

While it is true that the home leased at a higher rate three years ago… It’s not an accurate indicator of what the home will bring today. The market conditions and competition are constantly changing. We must always look at the math behind the risk/reward scenario.

In this example, the owner would need to lease his home with less than 30 days vacancy and NO turn costs in order for his 11% rate increase to get him ahead financially. Is that realistic? The answer for this property is: No. The answer might be yes in a different market or for a different property. However, we know the leasing history on this property and it typically takes over 30 days to place a qualified tenant.

In review of this homes leasing history and condition in relation to the comps, we advised the owner to renew his tenants at a 3% rate increase vs. taking the risks associated with the 11% higher rate.

Ultimately, the odds of the owner breaking even or losing money was more likely if he tried to obtain that higher rental rate. And our owner was really happy that we outlined all the details so that he could make a more informed decision.