This is often a big question for newbie landlords. It’s probably one of the most frequent ones that I get, too. Well, although there is not exact science on this one, hopefully these next couple of posts can shed some light on how to figure out how much rent you could charge for any of your vacant units. I’m going to cover how I generally go about doing this and some of the free resources out there that can make finding the answer to this question much, much easier.
Step 1: What kind of landlord are you anyway?
The first thing you need to do is figure our if you what kind of tenants you are looking to attract. Higher rents tend to attract a different socioeconomic class of tenants than low rents. One is not necessarily better than another. I have had tenants who earned very little but were neat. Some were pigs, too. I have had tenants who earned very nice livings, yet were slobs. Others were neat freaks. I believe that the rent has less to do with the type of tenant you attract, compared with your overall screening process of the tenant themselves.
Some landlords take the approach that they offer lower rents so that they keep tenants longer. This is a double edged sword in my opinion. First, are you in this business to make money or simply for charitable purposes. If you don’t have sufficient cash flow by charging rents that are adequate to make healthy profits, are you able to keep the property in good shape and do the extras and improvements that will increase it’s value over time? Do you want the tenant to live at the property because of the low rent or because of the property itself. The low rent approach to me signals landlords who are not willing to step up to the plate and be good managers of their Landlord Business.
Other landlords are much more cavalier. Their feeling is similar to the following, if I can borrow a line from Agent Callahan (Clint Eastwood) in Dirty Harry. To them, the first thing to do is “you’ve got to ask yourself a question. Do I feel lucky? Well, do ya, punk?” They ask high very high, often unrealistic rents. I have found this is often due to a couple of reasons. First, they may be dealing with a real estate agent who is telling them they can get a rent this high and trying to justify their commission, which is often 8-10% of the first year’s rent up front at the signing of the lease. Sometimes it’s because the landlord purchased the property without doing his due diligence and now realizes he’s financially in over his head and needs high rents to make the property not be an “alligator.” Sometimes it just unrealistic expectations. There are other reasons, but you get the idea. Many times, landlords who have the properties at rents much higher than the local market are plagued with high vacancy rates and tenants who eventually simply can’t pay after renting awhile. Remember, many tenants are tenants and not owners because they do not have the financial discipline or skills to manage their money well.
Where do I fall? I think I ride the middle ground here. I want to be towards the upper end of the rent range. Based on the analysis that I do prior to purchasing the property, this allows me to help maximize my profits, continue to care for and improve the property, retain tenants for a reasonable amount of time and overall have pretty low vacancy rates. I also find that this reduces the number of appointment that I have to make with unqualified tenants, yet isn’t so high that I scare some of the qualified ones off.
So, what kind of landlord are you? Do you entice them with low rents and try to keep them so that you have little turnover and not worry about the cash flow so much? Or do you want to get the most rent you can, feeling that this helps attract a better tenant and provides the most profit? Or are you somewhere in the middle and try to mange it in a more holistic way?
In the next post, I’ll discuss at least four free ways to more accurately figure out how much rent you can charge and how to also know when you should consider raising rents on your current tenants.
Regards,
-Steven Boorstein
Author and Landlord
https://www.managerentalproperty.com/
http://www.howtobuyrentalproperty.com/