Setting Asking Rents
Choosing the right asking rent is a key business decision. Setting the asking rent is a decision that can affect cash flow, property operations, tenant satisfaction, tenant retention, and property valuation which can affect a landlord’s ability to sell or refinance the property. The challenge in setting asking rents is determining a rent range favorable to the landlord yet attractive to potential applicants.
The right rent is a powerful influencer in tenant selection of a new rental. Setting rents below market rents can have a negative impact upon the landlord’s business by reducing cash flow and potentially limiting the landlord’s ability to maintain the property to good condition. Setting a lower rent at the beginning of a lease may make it difficult to raise rent to market rents at time of renewal that are acceptable to the renewing tenant for the current market conditions and comparable properties.
An asking rent that’s clearly above market can lead to prolonged vacancies, increased marketing expenses, and high tenant turnover. A higher asking rent will not necessarily reduce tenant turnover or yield higher profits.
Setting rents is not a singular event. Analysis and evaluation of market conditions, business necessity, and local demographics should be a routine practice for setting asking rents for new vacancy listings or renewal offers. Finding the right range of rents allows a landlord to stay flexible with market rent pricing yet manage potential business financial risks.
The asking rent should be an amount sufficient to cover debt service, reserves for property expenses, and provide cash flow. Minimum rent requirements will differ with the type of property; e.g., single family home, multi-unit housing, and location and condition of the property, Maximum rent requirements, even for the best properties, will at some point become self-limiting. The goal is to develop a range of rent that can appeal to the broadest cross-section of the rental market as adjusted to current market and business conditions.
How does a landlord go about setting his asking rents? The landlord should conduct research on comparable neighborhood rental communities/properties, analyze comparable data by property locations, property condition, unit square footage, floor plans, features, amenities, and listed rents. Assessing forecasted neighborhood growth and projected supply and demand conditions can help the landlord in his business planning for the future.
Factors that influence setting of rents include:
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 facilities, schools, retail stores, grocery stores, and restaurants could provide leverage to justify a higher rent.
Type of Property: The type of property; 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 remodeled units.
Market 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 property management operations.
Square Footage: A 1,000 square foot one bedroom unit is typically more desirable than a 750 square foot one bedroom unit.
Bedrooms and Bathrooms: The number, size, and placement of bedrooms and bathrooms in a unit 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 such as new appliances, flooring, kitchen and bathroom tile and other amenities are more attractive to potential tenants than units without upgrades.
Other factors to consider in setting asking rents include:
Lease Term: The length of the lease term may allow some adjustment of rent if a quality tenant is selected for a multi-year tenancy. A landlord may want to be flexible to a potential tenant request for an adjustment of rent for a custom lease term.
Median Income: The location of the rental unit has certain demographics associated with it, as example, the median income of residents in that geographic area. Setting asking rents in excess of potential tenants’ earnings abilities will limit the size of the applicant pool, potentially extend time to rent-up, and may have the potential for tenant early departure due to rent defaults. Setting asking rents in line with market rents, while keeping in mind the average income of the expected potential applicant pool, can help fill vacancies quickly and reduce down time.
Market Trends: Market trends, legislative changes, and demographic changes will impact local markets and business practices. Rental policies and practices must be in compliance with current laws.
Occupancy Rate: Comparable analysis should include data on average occupancy rates in neighboring rental communities. .A landlord should review his average occupancy rate to determine if he is higher or lower than the average occupancy rate for local area properties. A higher occupancy rate may be an indication that the rent is set too low or it may be that tenants are satisfied with the landlord and his properties and don’t wish to move. A lower occupancy rate evidenced by frequent tenant turnover may be an indication that the asking rent is not sustainable for the market area or that property operations, including tenant screening and selection, lease terms and conditions, and/or property conditions are not satisfactory to tenants.
Property Condition: A factor in setting asking rents is the condition of the rental property. Poorly maintained properties are not attractive to quality tenants able and willing to pay market rents for well-maintained, quality properties.
Seasonal Demand: Seasonal demand for rental properties can be a factor in the asking rents. Demand is usually higher in the summer months and, correspondingly, asking rents are higher.
Emotions: Choosing a new rental is a big decision for many tenants. The curb appeal of a well-kept rental property, a desirable location, or unique features that appeal to the tenant’s emotions can work in the landlord’s favor to set asking rents a little above market rent yet acceptable to the tenant.
Price-Value Relationship
There is a factor of the perceived value that will be received in exchange for a stated rent price. A prospective tenant weighs the expected value of the offered rental property and services against the listed rent. If the prospective tenant believes that the rental unit is of good value to him, whether it is location, rent, features, amenities, or other livability factors, the prospect may be willing to pay a higher rent.
Research conducted on comparable properties allows a landlord to determine the value range of his properties. While each prospective tenant has a value rating system unique to him, if a prospective tenant must choose between two comparable properties, the prospect will most often choose the property that the prospect believes is the best value. This is an important factor to keep in mind. While rents are a primary decisioning factor, the landlord, the property location, condition, features, amenities, and lease terms and conditions all differentiate one rental property from another and correspondingly its perceived value to the prospective tenant.
Another perception in the market is that higher rents are indicative of a higher standard of living and therefore attract a better qualified prospective tenant. Regardless of the asking rent, all applicants must be qualified to the same rental standards for fair housing compliance. The asking rent does influence to some degree the number of responses that may be received from rental listings. The applicant pool may be limited due to income requirements for qualification.to rental standards. However all prospects and applicants must receive the same consideration for tenancy in a non-discriminatory manner in compliance with the landlord’s pre-screening policy and practices and fair housing requirements.
After adequate research and analysis of comparable properties a landlord should be able to adjust his rents accordingly to the desirability of his units’ features and amenities that are more attractive to potential tents. As examples, units with a garden view are more attractive than units with a view of the parking lot; an open floor plan allows more options for livability; a ground floor unit can be more attractive than a third floor walk-up; or a unit with extra closet space, balcony or deck, or lots of windows can be attractive features that a potential tenant would be willing to pay a little higher rent.
Developing best practices for setting rents that assist in maximizing profit, minimizing vacancy, and aid in the selection of a quality tenant willing and able to pay market rents and maintain the property to good condition is possible when a landlord conducts his due diligence for comparable properties and performs adequate analysis of all influencing factors that affect asking rents.