​The Dilemma:

It is time to rent out your vacant unit. Your property manager says the market rent is $1,200 per month. You cannot afford to take less than $1,300. Do you wait to find a tenant or accept less rent? What should you keep in mind when you set a price for your rental?

This is a common situation that many landlords find themselves facing. Most investors have monthly financial obligations such as a mortgage, property taxes, and homeowner insurance. After paying those, you expect, and rightly so, to be able to pocket the profits.

When you set a price for your rental, what if your property manager informs you that your target rent is too high? Your first response may be to pressure the manager to rent the unit for the higher amount regardless of the market limit. While on the surface it may look like the wisest decision, in the end, it could cost you more and eat up more of your profits. Consider this:

Above Market Rent Units Stay Vacant Longer

Most tenants have a good idea of what is the market rent for an apartment or a house. They have been looking at and comparing all of the available rentals – including yours. They will know if you are trying to get more than you should out of your rental.

This means that most tenants are going to opt for the cheaper units first. Your more expensive units will only be rented when all of the cheaper options are taken – meaning that your unit is going to stay vacant for longer.

This could cost you hundreds of dollars in profit. Consider this example:

 

  • Market Rent: $1,200/Mo
  • Your Rent: $1,300/Mo

Annual Gross
Rental Income:

  • $ 14,400
  • $ 15,600
Average Annual
Vacancy:

 

  • 3 Months

Average Annual
Loss of Income:

  • – $ 1,200
  • – $ 3,900

Annual Adjusted
Rental Income

  • $ 13,300
  • $ 11,700

Just having your higher-priced rental sit vacant for an additional two months will mean that you will earn $1,600 less than if you rented your unit at the market rate! But that is not the only loss you will take.


Do not forget that when your pricey unit stays vacant longer, you must now cover the monthly operating costs out of pocket. This will lower your annual income even more.

Consider the above
example again.

 

  • Market Rent: $1,200/Mo
  • Your Rent: $1,300/Mo

Average Annual Vacancy:

  • 1 Month
  • 3 Months

Annual Adjusted
Rental Income

  • $ 13,300
  • $ 11,700
Monthly Fixed
Expenses:

 

  • Mortgage
  • $ 400
  • Real Estate Taxes
  • $ 120
  • Property Insurance
  • $ 120

Total
Fixed

  • $ 640

Total Owed
During Vacancy

  • $ 640
  • $ 1,920

Annual Income less
Vacancy Expenses

  • $ 12,660
  • $ 9,780

​Because your unit sat vacant for two additional months in order to get a tenant paying a higher rental rate, you ended up earning $2,880 less in order to charge $100 a month more. Here is another reason why it is better to set a price that matches the market rent.

By doggedly sticking to an above-market rental rate and pressuring your management team to get the unit filled at all costs, you could end up with a sub-par tenant. Tenants that have sketchy credit ratings are often willing to initially pay more to get into a place. The problem when we lower the application standards to fill a unit is that you could end up with a tenant that trashes your unit or doesn’t pay the rent at all.

Market rents will increase over time. We suggest that you set a price that matches the market rent for all of your units. That will allow us to reduce your vacancy time and keep your cash flow steady. We can also carefully examine areas where we can reduce operating costs to increase your profits. Meanwhile, we will keep our fingers on the market pulse and adapt to increasing rents as tenants renew their leases.

If you’d like to discuss more options for having a professional manage your rental property contact us here and we can provide a cost quote, or virtual rental evaluation to nail down potential income.

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