Pricing a rental property is more complicated than most investors understand, especially if you want to get it right.
We’ve all heard stories about what a neighbour or another investor was able to rent their unit for. If they could get that rent, you should be able to get the same, right? Unfortunately, that’s just not true. In fact, that type of logic can run you into some big trouble as a landlord.
No matter how intelligent and sophisticated investors can be, it’s easy for many of them to forget that the real estate past does not equal the real estate future. The rental market is no exception to this rule. The rents you charged yesterday have no bearing on the rent you can expect to charge tomorrow.
Big cities like Toronto or Vancouver can experience significant fluctuations in inventory from week to week. To succeed as a landlord you need to know how to read the market and adapt your pricing accordingly. This often entails revisiting your strategy several times in a month to make sure you’re staying competitive and on top of your game.
Here are the seven essential steps that I use to price rental properties so they rent quickly and for the highest dollar.
1. Think like a tenant. Successful landlords are able to put themselves into their tenants’ shoes and consider what’s most important to them. Since the tenants are your customers, your capacity to attract and retain them depends on your appreciation for what they value. Thinking like your tenant will also help you to purchase the ideal real estate investment as well.
2. Know your strengths and weaknesses. To compete for the best tenants, it’s essential to identify what your property has to offer and what distinguishes it from your competition. Once you have committed to thinking like a tenant, it’s easier to be objective when it comes to determining the strengths and weaknesses of your rental property.
For example, if you are renting a two-bedroom condo that’s ideal for families with kids, it’s important that you highlight its strengths in your advertising copy. Perhaps you should stress that it’s spacious with lots of storage capacity, that the building has a swimming pool and that it’s situated near good schools. Of course, you should avoid making things up. Being honest is the best policy for long-term success.
Knowing your weaknesses will also help you be realistic in terms of positioning your property. If you know that there’s another rental property that is better than yours in many respects, it makes no sense to price your unit at the sameprice point or higher.
3. Evaluate your competition. If you’re renting a two-bedroom condo, you should pull up information on every two-bedroom condo you’re competing against in your neighbourhood. Remember to compare apples to apples. For instance, it makes no sense to compare your unit to a two-bedroom condo that is twice as large as yours. Once you have the right information at your fingertips, it’s time to think like a tenant again and assess the strengths and weakness of each and every property in your particular market.
Does your competition have more or less square footage than your rental property? Is it situated in a better or worse location? How is the layout? Does it have better or worse upgrades? These are just some of the many questions you should ask yourself when evaluating where your property ranks against the competition.
4. Establish a tentative price point. Once you know your competition and how well your rental property compares to what is out there, you can estimate what rent to expect. For example, if the properties with better features are priced at $1,700 per month and the properties with worse features are priced at $1,600, you can expect to price your property somewhere in between.
5. Check in on historical data. Many investors misuse historical data. They inaccurately assume that because a similar property rented for a certain price 30 days ago that they can expect the same rent too. The market does not work that way. What units rented for in the past is irrelevant to a prospective tenant who is evaluating his options from what is available today.
Nonetheless, the past can help us gauge whether we are off track. With respect to pricing, it’s helpful to take a look at what other comparable rental properties have been renting for in the last 60 days. For instance, a tentative price point of $1,650 per month seems reasonable when comparable properties have been renting for between $1,575 and $1,725. However, a tentative price point of $1,900 would trigger a red flag and prompt a re-evaluation of all steps taken to this point.
6. Adjust to demand. This is the single most important step in pricing your rental property. Surprisingly, it also happens to be the step that most investors overlook. When you are competing for tenants, you need to know how strong the demand is so that you can adjust your strategy accordingly. If you are competing against ten other two-bedroom condos in your neighbourhood, it’s essential to know how many of these two-bedroom condos are renting per month. Your strategy will differ depending on the answer to this question.
Naturally, you will have to price far more aggressively in circumstances where only 10 per cent of existing condos were renting out per month than you would if 90 per cent were renting out. To understand the demand in your neighbourhood, calculate the average monthly number of comparable units that have rented out by using three months of historical data. Your Realtor will be able to gather this information for you using their access to the MLS system.
7. Revisit these steps. The rental market tends to be more fast-paced than the home-buying market. That’s why it’s important to re-assess your pricing frequently. Personally, I like to go through these steps every two weeks to ensure I stay positioned right. The more often you engage in this exercise, the better off you will be.
Pricing your rental property the right way takes a lot more than guess work. Mastering this skill is essential to your success as a real estate investor. Like all skills, this one takes plenty of practice, but the hard work is surely worth the price.
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