Setting Rents
Setting the right rent can attract and retain quality tenants. The right rent can make a positive difference in the property’s cash flow, tenant satisfaction, and stable occupancy.
For business viability, setting the right rent is not a one-time pricing event. A landlord must routinely check market conditions to evaluate and adjust his rents based on his local area.
Market Survey/Market Rent
A market survey is a snapshot of the current market conditions. A survey gathers information on local market projections, rental trends, and changes in market demographics. Conducting a market survey to determine current rental rates under existing conditions can help a landlord determine if his rents are competitive. Market research may determine the feasibility and timing of rent increases and what rate of increase would keep good tenants yet provide satisfactory cash flow for business operations.
Market rent is a factor of supply and demand conditions in the neighborhood area for similar properties by location, size, physical condition, amenities and services. Rents are influenced by how much tenants are willing and able to pay for comparable units.
Setting the correct rent for a property can mean the difference between an extended vacancy and a rapid installation of a quality tenant. Business operations analysis may point to the need to raise rents to keep current with expenses such as property insurance, taxes, maintenance costs, and property management.
Setting the rent much above the market rent can mean fewer applicants. Potential tenants searching rental listings can quickly eliminate a rental unit from consideration if the rent is even a small percentage above market rents for that area. With fewer applicants a landlord may need to consider his business options – adjust his rental standards to fill a vacancy or experience an extended vacancy period. Lower than market rent could mean reduced cash flow, perhaps a negative cash flow. However a slightly lower than market rent could also result in filling a vacancy sooner to offset reduced monthly revenue.
Fair Market Rent
The U.S. Department of Housing and Urban Development (HUD) conducts a study each year using census data and renter surveys to help determine rents for metropolitan and non-metropolitan counties. Fair Market Rents (FMR) is defined by HUD as the amount of money a tenant would be expected to pay for rent for a property with a certain number of bedrooms in a certain area of the country The gross rent estimate includes base rent and essential utilities that the tenant would be responsible to pay, such as electricity, gas service, or water/sewer services.
A primary purpose of FMR is to determine standard rental payment voucher amounts for the Section 8 Housing Choice Voucher Program and other government housing assistance programs.
Setting the Right Rent
Setting the right rent for a property may require adjustment as leases expire, ongoing market surveys are conducted, and new leases are written. While some trial and error pricing could be necessary to find the right range of rents, generally if a comparable market survey is done, a landlord can identify a range of rents for his properties. For comparison purposes at least three properties in the area of the subject property that are similar in size, features, and amenities should be used to determine a market rate. Comparison rent pricing could be obtained from:
- Meeting with property managers of comparable properties
- Networking with investors and fellow landlords in the local area
- Contacting local real estate brokers
- Viewing classified advertising online or other media
- Calling on neighborhood “For Rent” signs
- Attending Open Houses or Property Marketing Events
Market factors that influence rent
There are many factors that influence market conditions and, accordingly, rent rates. Rent rates vary from area to area and location to location within an area. Influences can be exerted from external events – legal, social, economic, demographic, and environmental issues – and internal conditions arising from business management, ownership issues, and financial resources. The following influences usually condition market rents:
- Location: The location of the rental unit/property is always a factor in all phases of property management. Location can influence marketing and advertising, the applicant pool, rental standards, market rent, tenant selection, and tenant retention. If a property is located in a desirable neighborhood comparable in features and services to similar properties, supply and demand conditions could be favorable to set rents that meet or exceed market rents. Proximity to local goods and services such as medical offices, schools, retail stores, grocery stores, and restaurants could provide leverage to justify a higher rent.
- Type of Property: The type of property, whether single family residential or multi-family housing is a factor in setting market rents. Single family housing typically can command a higher rent.
- Property Construction: Tenants may be more willing to accept a higher rent for new construction properties or recently renovated units.
- Demand: Supply and demand conditions may necessitate a downward adjustment in rents if the supply of units exceeds the demand for rentals. Market surveys will alert a landlord to changing conditions and the need to make changes in rental terms and conditions.
- Bedrooms and Bathrooms: The number and size of bedrooms and bathrooms are decisioning items for a number of potential tenants. A larger unit with more square footage in comparison to other rental units in the area may justify a higher rent.
- Amenities: Unit upgrades, open floor plans, and outdoor living spaces can differentiate one rental property from a similar one in the same neighborhood. Certain amenities allow a landlord to set a higher rent as substantiated by a market survey of other units in the area similar in size and amenities.
Market rent pricing is usually adjusted according to unit size and property amenities. However a different strategy could be considered to price rental units. Accordingly, unless rental units are exactly the same size (bedroom, bath, square footage, floor plan) and can be said to have same features and access to same amenities, a landlord may be missing the opportunity to price his units according to beneficial differences in amenities. Amenities that value to the property and are attractive to tenants are selling points that can translate into setting market differential higher rents yet within the range of market rents. Tenants make a financial decision on the base rents but place value on interior features such as units with large windows, a garden view, an extra closet, a balcony, ground floor units, updated kitchens, and new floor coverings. Curb appeal of the exterior building and grounds is important as well. Well maintained units with appropriate landscaping, green spaces and recreational facilities/areas can be decisioning factors for potential tenants willing to pay a little extra rent.
Business factors that influence rents
Business policies and practices can influence rent pricing and, accordingly, occupancy and vacancy rates. Some landlords have sufficient reserve to withstand vacancies while others depend upon full occupancy and timely rent payments to meet their financial obligations.
Property management costs must be factored into the setting of rents. Some properties are more expensive to maintain than others. Adequate reserves for emergency repairs, insurance, and taxes also are a factor in planning and setting rent policies. Seasonal demands for rental units can influence rents, for example, setting a lower rent in winter months due to reduced market demand.
Rental policies such as lease terms, furnished or unfurnished units, pet policy, and assignment of utilities responsibility can be a factor in setting rents and a decisioning factor by tenants in choosing a rental unit.
The types of amenities available at a rental property can have different effects on rental value. Many tenants place high value on assigned parking spaces and garages and are willing to pay an additional fee for such amenities. Recreational amenities such as fitness centers, walking trails, tennis courts, basketball courts, and swimming pools are attractive to renters but may increase management costs for maintenance, repair, and facilities management. Interior unit upgrades are desirable amenities by most tenants when searching rental listings. While there are costs associated with upkeep for upgrades such as appliances, in-unit washers and dryers, the value of such items for tenant satisfaction with potentially higher rent can make a positive contribution to the business bottom line.