How to Price a Rental Property – Maximize Earnings But Remain Competitive

August 28, 2009 | by Kim (email) |

One of the challenges of being in the rental business is overcoming the tension between the desire to earn as much as possible – at minimum making enough that it’s worth staying in the rental business – while not pricing yourself so high that your properties sit empty for any significant amount of time.

When I was ready to advertise our townhouse most recently, I found that I was most objective when I kept the cost of an empty rental in the forefront of my mind, even as I researched how much we could possibly charge.  Sure, I was proud of our house, the work we had done; and I DID believe it was in a great neighborhood in a great location.  But my pride and joy could not over-rule my common sense when it came to pricing it.

$$$

Keeping up with the Joneses … or at Least the Complexes

Since our rental is a two-bedroom townhome with a fenced backyard, a finished basement, community amenities, and totally-new upgrades, I started my research with the local apartment complexes.  Our house should command more than a two-bedroom apartment in one of them, for sure.

Once I established that baseline (in my case a minimum rent of $1285), I went onto Craigslist and perused the other rental ads, looking for comparable houses in the area.  What I found was three or four other two-bedroom and three-bedroom places, ranging in rent from $1300 to $1500.   Those in the higher range had been listed longer, while the one for $1300 disappeared after a couple of days, and I assumed it was filled.  But pride aside, our place looked nicer than that one and had the fenced yard, so we aimed just slightly higher at $1375 and decided right away that we would charge a pet fee of $25/month per pet (and an additional security deposit – we learned THAT lesson last time!).

We ended up with two roommates, one of whom has a dog, so – voila! – $1400/month it is!

What’s the Bottom Line?

We achieved immediate occupancy; the tenants took keys less than a week after my first ad ran.  With that fast a turnaround, I was tempted to wonder whether we could have asked a little more.  However, I reminded myself that if we had posted the rent just $50 higher, while we might have gotten it, we would have knocked ourselves out of some of our prospective tenants’ price-ranges.   Including those who actually became our new tenants.  And with even one month’s delay in occupancy, we would actually have netted $850 less for the next 12-month period:

$1400 x 12 = $16,800

$1450 x 11 = $15,950

It was worth it to us to rent right away instead of targeting a higher per-month rate and missing out on getting to choose our renters from a pool of good people, rather than waiting around for somebody, anybody to please come rent.  It’s the fine balance between greed and practicality.  🙂

Those other Empty-Rental Costs…

Aside from just the dollar figure, there are other costs we had to consider when we named our price:

1. Property Maintenance – as long as our house sits empty, guess who’s mowing the lawn, checking the mailbox, dusting, and whatever else?  Yep, us.  And we have our own place we can barely keep up with, thank you very much.
2. (Un)natural Disasters – if a pipe starts leaking, a tree branch falls, or a neighbor’s cigarette starts a mulch fire next door, we don’t want to find out about it days after the problem starts.  We want to know right away.  And (good) tenants are there to tell you about that sort of thing, so you can address issues while they’re still small and not have a huge, preventable mess to clean up.
3. Vandalism & Break-ins – Our rental townhouse used to be my house.  I lived there alone when I was single, and I felt quite comfortable in the neighborhood.  However, even in the nicest of areas, there are “those people” (whoever they are) who scope out vacant properties to damage (or sometimes inhabit!).  Maybe it’s fun to be destructive; maybe “they” have anger that needs to be channeled somewhere.  Whatever the motive, we don’t want our place to be the one that gets hit.  We actually did keep that in mind when we advertised.  The house had already been vacant for two months while we renovated, and we knew all the neighbors were quite aware of that (it’s hard to miss a petite white girl hanging out the second-story while replacing windows, as it turns out).  Once the work was done, we wanted people – good people, for sure, but PEOPLE – in there as soon as reasonably possible.
4. There Goes the Neighborhood – this last item was less of a consideration for us this time, but it IS a consideration.  If a community has multiple rentals in it, and more than a few are sitting empty for any noticeable period of time, that neighborhood starts to feel like it’s in decline, even if it really isn’t.  And once it has felt like a declining neighborhood for a while, it actually becomes one.  Because prospective tenants don’t want to dodge tumbleweed or hear only the echoes of their own voices.  They want to see an active and vibrant community – even if they only plan to stay for a year.  So being a responsible landlord and getting your place filled benefits everybody, not just your own bank account.