By Zack A Wiest
What rental rate should I be charging my tenants? Should I just ask for as much as I can get? While you would think the answer is charge as much as you can charge and demand the highest rent, it is not.
There is no question you want to charge market rate, but let’s just think about this for a minute. If you were a intelligent, qualified, and great tenant you would be a savvy shopper wouldn’t you? Yes, you would be, and what that means is you are not looking to pay top market rent you are wise with your money and want a nice property at a nice rent.
If the market rent for a 3 bedroom/ 2 bath home is $1,000 and you try to command $1,150 a few negative things are going to happen. The first is that you are going to more than likely have a higher vacancy rate.
Secondly, you are going to have fewer prospects to choose from, which can ultimately lead to a poor quality tenant. And finally, you are going to have higher turnover, which again will cost you money and loss of revenue.
Looking at our example of the 3 bed/ 2 bath home with market rent of $1,000, what would happen if you offer it at $945/month. Well, I can tell you; a lot of good things that definitely are worth more than the $660/year you are trading for them by renting your property for $55/month less. When you are advertising your property at $945/month without question the number of inquiries and applications will almost double.
Now, with more applications to review there is greater potential of finding a more qualified tenant. This is not a guarantee but the chances of finding a qualified tenant increases when the number of applicants increases from 2 to 15.
The next benefit of this lower rent is a compound benefit. First, turnover should be considerably lower if your rental unit is in good condition and you or your property manager is maintaining it. Picture again you are the tenant paying $945/month in an area where the market rent is $1,000 and living in a nice rental unit, why would you leave?
That’s right unless you have to move out of the area or the unit does not meet your size or room number requirements you are not leaving. So, here comes the compounding part first there are exceptions to this because some tenants will damage your property, but if you screen well with your increased number of applicants you should avoid damages.
If your tenant knows they are getting a great deal and do not want to have to get lesser quality or pay a higher rent they are going to be a better tenant (with exceptions) keeping the unit clean, paying rent on time, all the things that make a great tenant. The $660/year that was trading for these benefits more than likely would not cover the cost of the turnover and vacancy associated with it.
Ask any longtime landlord and most of them have discovered this. An individual just the other day said I used to charge $1,600 for this unit but now I reduced it to $1,350 because I couldn’t keep anyone in it very long.
They finally realized the extra monthly rental payment was truly not extra. At PA Deals we recognize this and analyze all the deals we offer our clients with real rental rates, rental rates that lead to success with your long-term buy and hold investment. PA Deals understands long-term tenants greatly increase the profitability of your buy and hold business.
PA Deals, LLC is a residential real estate investment firm located in Harrisburg, PA. Though founded in 2006, the principals of the company have been investing in real estate since the year 2000. You can find out more about us at http://budurl.com/padealsarticles.