The Rental Business: Pricing Your Rental

The next topic in this series on the business of owning and operating rental homes is pricing the rental. We have discussed how to purchase and prepare the property and bring it to market in earlier blogs. If you are attempting to do this for the first time, you should get a mentor. I encourage you to read my post on that subject.

One insane fear that keeps people from investing in rental real estate is this: “What if it does not rent?”. I have heard this time and again. Now, assuming you have created the product as we have talked about, you will have more people wanting to rent it than you can imagine. We just need to get one more thing right: The Rent. We talked earlier about how to value a single family rental home, using the Comparative Market Analysis method. Finding out what a house will rent for is done in a similar manner. You look at past rent prices of comparable houses and arrive at a rent per sq ft to compute your property’s rent. You can pull properties that have rented out in the past year or so (not just past three months as we did for sales) to get sufficient hits.

So, once you have arrived at a rent from other comparable houses, there are a couple of things you should know. First, your rent must be better. You already have a better product, now you must create a better price. So discount the rent. We talk about rents ranging from $1,100 to $1,500 in these posts. In this range a $50 rent reduction will suffice in most cases. Sometimes you may have to discount by up to a $100. The second thing you should know is that if you go by data in MLS alone to arrive at your rent, you are leaving out landlords who are not working with agents. Sometimes, this can be a large population. So you need to drive the area your rent house is in and call other homes that are for rent before you arrive at the final price. You may find that the homes that the landlords are renting directly may be slightly overpriced than the ones in MLS. MLS shows agents not just the listing price but the final lease price as well. When you call landlords directly, you are only calling the ones who have a property on the market, so you can’t know what it eventually will lease for. Almost invariably, this will be lower than the asking price. You may be able to apply the same list price to lease price ratio from MLS to the landlords’ asking rent to arrive at an eventual rent price. I would urge you to use both MLS data and information you get from other landlords in your area to price your property. Once you know what your asking rent should be, discount it. Now, you have the best product at the best price.

You have prepared the property as we have talked about and have marketed it as we have discussed as well. Your goal is to get this rented as soon as possible to minimize your vacancy cost. So it’s imperative that you discount your rent. For a $1,500 rental, if the property sits on the market for a month, you would have lost more money than by discounting it by a $100. Many landlords, wait a month and then resort to discounting it, losing even more.

One other thing about discounting your rental: It attracts good people, people who are responsible with their money. Who’s worried about rent? Someone, who’s planning to pay it! I will write a post on how to qualify tenants. For this discussion here, it suffices to say that you want your tenant to be someone who’s looking for a good deal.

I have mentioned this before: To buy your foreclosure and to list your rent house, work with an agent (or mentor who has a real estate license) who owns and operates rental homes. It is key that your property is priced correctly when it is exposed to the market the first time.