Rents are high right now, and that might encourage you to push what you’re asking even higher. Tenants out there are desperate for good homes, why not try to get every penny you possibly can out of your potential renters?
This is a strategy, but it’s not a smart one.
Of course you want to earn as much rent as possible, and you want to leverage the strength of the current rental market. Every real estate investor we talk to and every landlord we work with wants to get as much rent as possible for their property. It’s part of increasing your short-term cash flow and your long-term ROI.
But you have to remember that rent isn’t the only thing that makes you money. It doesn’t make up your entire income as a real estate investor. At some point, you will have to decide what you’re willing to risk in order to reach the highest possible rents.
Hopefully, you won’t sacrifice income.
Smart investors will take consistent and growing income over the highest possible rents. When we talk to our owners about where to set their rents and how to adjust their rent at lease renewal time, we’re very much aware of what the price will mean for vacancy, retention, and tenant quality.
You can always raise your rents when it’s time and the market supports it. But, you cannot ever earn back the money you lose on a vacancy that has stretched too long while you waited for a tenant who was willing to pay your higher rent demands.
Consistent Rental Property Income vs. Vacancy Risk
Think about the income you earn every month, which is basically your rent. Then, think about the income you earn every year, which includes the appreciation on your property, the amount of your mortgage that your tenant has paid off, and the tax benefits you’ve earned by renting out a home.
Some owners don’t like to think long term. They judge their success on the amount of money that tenants are paying them month after month. These are owners who are only looking at a single metric, and that’s the rental amount.
When you take this approach to pricing your rental property, you might keep rents high even if it means waiting longer for a tenant to lease the home. It might drive you towards the short-term rental market where the per-night rate is much higher.
It seems like you’re making more money, but you can’t necessarily see what you’re losing.
Long-term investors who are more interested in their annual income will be willing to sacrifice a higher rent for lower vacancy and the stability and longevity that comes with 12 months of fixed rental income.
You’ll also have to consider what kind of tolerance you have for risk. If you’re going to wait until you find a tenant willing to pay $100 more per month than the market demands, you’re going to have to sacrifice a month or more of rental income while you look for that tenant. Do the math and you’ll quickly find that you’re losing a lot more with the higher rental amount than the lower rent and the quick move-in.
Vacancies cost you money. Vacancies require more maintenance. You’re actually losing money when your property is vacant for a month or two longer than it should be. You’re losing a lot more money than what you think you’re gaining with the higher rental value.
High Rents Can Hurt Retention and Increase Turnover
If you price your rental property higher than most others, you might eventually find a tenant.
But, that tenant is unlikely to stay in place for very long. They’ll know they’re overpaying and they’ll look for a similar property that costs less, moving when the lease is over.
High quality tenants are going to earn more for you in the long term than less qualified tenants who are desperate to rent a home even if the price is too high. If you keep your monthly rent higher than the market rate, you’ll get applications from people who have been denied elsewhere. This gives you the rent you want, but it puts you at risk for late payments, eviction, and other financial risks.
Think about turnover as well. Turnover is even more expensive as vacancy. A good way to lose a high performing tenant is by increasing rent dramatically at renewal time.
Most tenants expect their rent will go up a bit every year, and you should always implement an increase if the market supports that. However, you don’t want to make unreasonable demands. Your good tenant will move out, and you’ll have to pay for turnover and maintenance and a whole new leasing process.
When you’re deciding how much to increase your rent at renewal time, leave it slightly below the market rents. This will encourage your good tenants to stay. They’ll see that they’re getting a deal, and they will have no reason to move on into a different, more expensive property.
Good tenants leave their rental homes for one of two reasons. Either maintenance is ignored or the rent is raised too high.
Understanding Visalia Market Trends
Currently, the market is demanding high rents.
That’s good news for landlords and property owners.
But, don’t overplay your hand. What’s the point in renting out a property that no one can afford? You won’t get any tenants and you won’t collect any rent.
This is a strange market for us, where rents are skyrocketing. It’s more important than ever to keep your good tenants in place, so make sure you’re attracting them with a good rental value that they can continue to pay. Setting a rent that’s too high might require you to make some concessions when it comes to screening. What if you can’t find anyone who earns three times the monthly rent? You don’t want to risk placing an unqualified tenant just so you have someone in place paying your high rents. You might find that they cannot continue to meet their obligations.
Pay attention to comparables in the market, and focus on overall income, not monthly rental price.
We’re here to help you earn as much rent as possible, but we also know how to ensure your investment earns as much as it can. If you want to know more about what we mean, please contact us at The Equity Group.
