It’s the million-dollar question every property manager faces: How much should I charge for rent?
Coming up with a rent estimate takes research and an honest look at what your property does and doesn’t offer to prospective renters. But finding the right number a tenant is willing to pay shouldn’t make you toss and turn at night.
Rent Estimates Vary Based on the Source
There’s a wealth of rent information you can find online, but the numbers you find usually vary. For example, $959 for a 1-bedroom house on 14th Avenue in south Minneapolis is reasonable, according to Rentometer.com. But Zillow.com’s Rent Zestimates says that same 1-bedroom could rent for $1,100 a month. Trulia.com shows three properties for rent in the same neighborhood ranging from $895 to $1,595.
So how much should you charge? The six simple steps in this article will guide you through coming up with ballpark estimates, researching conditions in your market, and finally, calculating the optimal monthly rent for your units.
Determine a Ballpark Rent Estimate for Your Market
Zillow, Trulia, Rentometer, and other sites like them have information that helps you determine a ballpark figure or range for the rents in your market. At these sites, you can compare rent in your area based on features like:
- Number of beds and baths
- Square footage
- Pets permitted
- Type of heating (and cooling if applicable)
But as you can see from the above example, online research won’t give you the absolute answer, but it does provide a good starting point. “It’s a mistake to assume you can just aggregate everything from your computer in an hour and magically come up with the right number,” says David Last, owner and co-founder of Last2 Development in South Boston, Mass.
Research the Features of the “Average” Property in Your Area
Once you’ve determined a range, investigate your local market conditions, and that means hitting the street. Stop by leasing offices and drive through neighborhoods to gather details on competing properties. Find out what features most properties like yours have. Then you can start to compare your property to others that prospective tenants might be looking at.
If your apartment building has on-street parking while most competing buildings have garages, this suggests you might have to rent your unit at a lower price. But if the layouts of your units are better, that can drive the estimate higher.
Last recommends taking along a bank appraisal checklist so you can be more objective about your property and the competition. Look at items on the checklist like the number of bedrooms, square footage of the unit, the finishes (dated versus modern), etc. Each item, depending on its value, could add to or subtract from your initial estimate.
Additionally, you can piggyback on research that neighboring property managers or agents have done already. If you have a 2-bedroom apartment, visit leasing offices and ask about the rent for a particular 2-bedroom unit they’re listing. Then ask how much lower the rent should be for a similar but smaller unit, or one on a lower floor. “You can see what they’ve learned and apply it to your situation,” Last says.
List Your Property’s Advantages
Once you’ve learned what the average property in your market offers, you can start to figure out what yours has that competitors don’t. For example:
- Are you across the street from a cemetery? (It’s quiet.)
- Does your property have a spectacular view?
- Is it within walking distance of shops, grocery stores, and public transportation?
- Does it have bike storage?
Temper your enthusiasm with a dose of realism, though, and also be careful about charging rent in the highest tier in your market. “If you’re not the best thing on the market, you can’t price yourself like you are,” Last says.
Consider Your Prospective Clientele
Once you have a number based on the above, account for renters’ demographics. What would someone have to earn to afford your unit? What might tenants at that income level want or insist upon in a property in your market?
Jason Cincotta, principal at Boston-based Evergreen Property Group, warns against competing on features when you don’t have a realistic chance to win the battle. For example, some of the buildings his company owns are too small to justify a high-end gym. Cincotta says that no gym he could build would be as nice as the least expensive gym nearby. “It’s better to focus on something you can do really well,” he says. “We have no desire to be everything to everyone.”
As for pricing, some property managers cling to a price based on dollars per square foot. Cincotta, though, prefers a monthly rent figure, because that’s how most tenants think about rent.
Cincotta then compares the monthly number to the income a tenant would have to earn to afford the apartment. Next, he determines whether his properties are competitive for people at that income level. “If someone’s going to pay $36,000 a year to live in your property, you have to give them something special or find a way to offer it at a lower price,” Cincotta says.
What’s Your Tolerance for Vacancies?
Unless you’re in the driver’s seat and your unit rents immediately, you must decide how much vacancy you can tolerate to get the dollar amount you’re after. For instance, if you decide on $3,000 a month, that figure, plus lease-up fees, is what you’ll miss out on if the property goes unrented for a month.
So it may be better to just lower the rent by $100 to get the lease signed as soon as possible. That way, you would be giving up only $1,200 over the course of the year — instead of the $3,000 you would forfeit were the unit to remain unrented for a month.
On the other hand, Last says, “Some large owners I’ve met with feel that if they’re not carrying a 5 percent vacancy rate, they’re not charging enough.” If all units are occupied, so the logic goes, you’re probably not getting the maximum rent you could be. And if you undercharge by $100 and you have 31 units, you’re walking away from $37,200 for the year!
Market conditions count for a lot here. Consider a neighborhood where two new buildings with 100 units each have just opened. If the rental market is flooded, you may have to accept a lower number than your target figure until conditions stabilize.
Last sees calculating monthly rent as more art than science, and that’s truer with smaller properties than the bigger ones. “The more it’s an art, the more important it is to understand the market, not just your own building,” he says.
There’s no need to panic if your unit doesn’t rent right away. Remember that it only takes one tenant to fill the vacancy, and you want to find the tenant who’s the best fit. Of course, if you’re in a hot market and your unit is the only one not renting, it’s definitely time to recheck your numbers. Then again, the units renters are snapping up might be underpriced.
“The more unique the property, the more patient you might have to be,” Last says.
And finally, remember there’s no “perfect” rent number. But the more you know about market conditions and how your property compares with others, the more likely you’ll find the number that’s just right to keep your unit occupied and the revenue rolling in.
If you have your own tips for estimating rent in your market, leave a comment below and tell us all about it!Read more on Resident Management