Setting rent is sometimes an art and sometimes a science. Usually, it’s a mix of both, and there are a lot of metrics that are involved. It’s important to be sensitive to the marketplace and the factors that tenants are looking for. The bottom line, and the thing that makes home investors successful, is to buy and rent homes as investment properties that you would live in yourself. These are the homes that have the layout, the amenities, and the school districts that appeal to good tenants. Like you, tenants are looking for specific numbers of bedrooms, bathrooms, a garage, a yard with a fence, and all those things that are important when you’re buying a home.
Buy a Home that Fits Your Market
The price you pay for an investment property is not cleanly tied to your bottom line or your ROI because you will add those extra factors. Many times, investors find that by having a home with all those attractive features, they will pay $10,000, or even $20,000 more than they would for a home that doesn’t have those features. However, their long-term cash flow will be much better because they will have no problems with vacancies and turnover.
Using Comparable Rental Data
When you’re setting rent, comps can go a long way. Look down the street, in the neighborhood, and in the city to find similar homes and determine what their rents are. You can use that information, but every home is unique. Be careful not to overcompensate with comps or rely too heavily on them. Price your home for the exact features it has. There are some websites that offer mechanical market-driven comps. One of them is Zillow. You can go there to get a rent Zestimate. It’s an interesting concept they have, and it usually comes fairly close; within several hundred dollars. It’s not completely accurate, however. Zillow doesn’t really know what the actual rents are. They use the advertised rents. So, the data coming in is a bit flawed. They also aren’t comparing the attributes of homes. They don’t know if there are granite countertops or how high the school district is rated compared to other counties. They also don’t track metrics or the demand from consumers.
Property Management Data
A good management company will obtain click data. This includes all the impressions, clicks, brochure openings, how many emails they’re getting, how many offers for lease they’re getting, and how quickly a home will rent at a certain price. That’s a lot more helpful to setting a price than Zillow. This illustrates another good reason to use a management company. They can help you determine how much you’ll rent your home for and how long the vacancy period will be. Even one month of vacancy is a big expense. A $1,200 home that is vacant for one month translates into $100 a month that’s lost for the first year of the lease.
If you overprice a home and you find someone to rent it, chances are they will eventually recognize that they are overpaying. They’ll probably move somewhere else at the end of the year. Don’t leave your price too high, because you’ll lose money in the long run. Use a good management company that uses metrics from their own operations. This is the best source for getting fair market rent.
Other Pricing Factors
There are other factors that go into a price, such as location. Your city and county will make a difference. Seasonal fluctuations also play a part. If you’re renting out a home in June, you’ll find there’s a high demand. People are moving throughout the summer, and they will be willing to pay more for a house in June than they would in December. Be sensitive to that fact.
Other pricing considerations include the school district, whether there’s a yard, and if pets are permitted. People often rent single family homes because they can’t bring their dogs into an apartment, so keep your door open to pets. Consider whether there are local businesses, parks, trails, and other things in the neighborhood. All the things that are unique to your property must be considered when you’re pricing a home.
Rent is always an estimate. Start with a range and price it at the higher end first. Then, you know you tried. Follow the metrics and create a marketing funnel so you know your rental stats. You’ll be able to determine quickly if the home is priced too high. If so, bring it down or you’ll sit on an extended vacancy.
If you have any questions on fair market rent or Kansas City property management, please contact us at 33rd Company. We have over 20 years of experience, which we’d love to share with you.