The principles of supply and demand play as big of a role in real estate as they do in the marketing of those widgets you learned about in high school. A balance is struck between how many people want a product or service, and how many are available. This information is used to determine the price. A thoughtfully conceived price can make all the difference, particularly for landlords who see their units remaining vacant. Here are some things to be mindful of if you’re considering lowering the rent.
What Happens When the Rent Is Set Too High?
When your rent is too high, it can have a significant effect on the profitability of your investment. Because Richmond has a variety of rental options, if the rent is set too high, tenants are going to move on to the next. Some property owners may feel getting a higher-paying tenant is worth the wait. However, the cost of losing that business is typically higher than the benefits of getting more per month in rent.
This is known as “opportunity cost,” which is the cost you incur from lost opportunities to make money. The most poignant sign of excess opportunity cost in real estate is an empty building.
Hotel owners will tell you the most expensive room in a hotel is an empty one. The same is true for property rentals! The money invested in the purchase and upkeep of a property goes down the drain if it is left unoccupied for extended periods of time. Renters are quick to swipe past over-priced apartments and homes, especially if the listings leave something to be desired.
How to Tell If You Set the Rent Too High
As mentioned above, the easiest way to determine if the rent is too high is if your investment property remains unoccupied for an extended period of time. This is especially relevant if you notice that comparable properties are being rented out. Be sure you keep your property in good condition to eliminate inadequate upkeep as a reason for its lack of popularity. If it looks good—both online and in-person—and it’s still not renting, the price is the most likely culprit.
However, there are ways to tell the price is too high that don’t involve going through the pain of having a vacant rental property. You can check on the prices of other similar properties in the area. This should be done on a continuously. When doing so, be careful not to show favoritism to your property. Owners can be a lot like parents who see their child as nothing short of virtually flawless. Real estate is a lot like a child: It’s never perfect. Try to see your property as a renter would: look at it with fresh eyes. Compare your rental property to others, just like someone shopping for a rental does. Price comparison is one aspect of a more objective analytical tool: a rental analysis.
Perform a Rental Analysis
In addition to checking out the prices of similar properties, a rental analysis also investigates some of the less tangible determiners of the health of the local market. One of the primary factors is the convenience of the neighborhood. A rental analysis checks out local businesses to help you determine how much they contribute to the experience of renters. Grocery stores, libraries, parks, and other public facilities are all good candidates for evaluation. The analysis examines not only the types of businesses but also how often they're open and where they are in connection with a property you are considering. The proximity of such attractions to your investment property can be a significant draw for renters.
Additionally, a rental analysis provides a report of how much each comparable property is earning per square foot. This is a valuable tool in determining if you should drop your price as well as how low you should drop it. If your price per square foot is significantly higher, your property may not appeal to renters who value getting a lot of space for their buck.
A rental analysis also examines the rates of occupancy and vacancy of rented homes in the area. If the occupancy rate of your rental ends up being lower than that of similar homes, this could be a strong indication of a rent that needs to drop!
Hire a Property Management Partner to Help!
It can be challenging to know when to pull the trigger on dropping your rent. Figuring out how far to lower it is equally challenging. Hiring a property manager can be a quick, convenient solution. Because property managers have an intimate knowledge of the local rental markets, they have insights at the ready that you can use to make careful decisions. Mission Realty Property Management can even provide you with a FREE rental analysis! This valuable tool will provide you with all the information you need to decide how low you should go when it comes to your rental rate.