If you're reading this, I'm sure you have an investment property or two under your belt, you are probably looking for a guideline to make sure you charge fair for the rent, not low and not high, considering the possibility of many supplies of vacant units will occur after the quarantine. Determining the right property rent rates can be difficult at times most especially our community is being challenged by a pandemic. Not sure how much to charge for rent? You're not alone. There are many landlords out there who have perhaps a little idea or none at all how much will be the new rent for their rental property after the lockdown eases up.
If you charge too much, you’ll likely have higher vacancy rates but if you undercharge, you’ll lose out on profit. After all, what matters is about having a tenant paying the fair rent. Giving discounts might help, but make sure your rental business will survive after taking out all the expenses from the equation.
Here’s how to check if your rental unit is priced correctly and fairly.
The term "market rent" refers to the current average rent price for nearby rental property. Remember, rent is determined by the real estate market value. So when determining how much to charge for rent, what other landlords are charging is VALUABLE information.
However, keep in mind the additional variables that can affect your rent, such as:
· Location
· Number of Corona Cases in the area
· Supply of Vacant Units
· Nos. of occupants
· Furnishings
· Any special amenities
· Square footage
Prospective tenants may place more value on certain conveniences, like with washer and dryer or pet-friendliness or a few numbers of corona cases. That might mean higher rents. Just, pay careful attention to your return on investment and your boundaries.
Comparing prices from listing websites is the best strategy. However, you must do this with a realistic and reasonable comparison. Analyzing apple to orange will likely give the wrong information that leads to miscalculation. So How? Understand and know what type your property is. Then find identical properties on the listing website that resemble yours.
Draw your attention to the year built, the number of units, amenities, convenience, interior, exterior finishes, and rent inclusions. It’s unlikely that you’ll find an exact match, but this is still enough to get a good estimate on the rent.
You can also go low-tech simply drive around your neighborhood. If you pass any properties up for rent, call their owners and ask how much they are charging. This will give you a rough indication of how much you should be charging. You can do this after the strick lockdown, in the meantime do your research online. These methods will help you understand the viability of different rental rates.
What’s the average occupancy rate in the area? Is it 95 percent or 80 percent? How’s your property’s occupancy rate compared to the region’s? You don’t want it to be higher or lower by too much.
If your occupancy rate is much higher than the regional average, then your rent is probably not aggressive enough. If it’s a lot lower, then your rent might be too high or you might have a much bigger issue than just pricing. The formula for Occupancy Rate is occupied months over 12 months multiply by 100. If you have an 80% occupancy rate this is decent, higher rate meaning more profit will go to your pocket. However, it depends on your goals as well. It will be better to review your goals and set your boundaries before calculating the occupancy rate.
Property managers are great resources but please make sure you ask the professional ones. Ask them about the current market rents and for a market report to determine how much to charge for rent.
For the report, your property management company can give you a list of comparable properties with the current rents, which you can then verify yourself either by researching online or visiting the properties in person. They can also advise you on what amenities might increase your rent. For example, if your property lacks washer and dryer, adding one might be an easy way to raise rents by Php 1,000.00 per month. Of course, you should carefully calculate your potential return on investment before making any major changes.
Please do not offer your property to Property Managers who will offer your unit at a lower rent to be simply competitive. You're walking a dangerous path. In this way, you may be renting out your property fast but most likely to an unqualified tenant that will destroy your rent profit at the end of the contract or in between.
Once you’ve found a couple of similar nearby properties, call or visit the property as a potential renter. Ask questions regarding the current rent, unit size, amenities, utility bill, and any special features. Preferably, you should visit the site to get a good feeling of the property overall.
Go through these steps at least once or twice a year for each of your properties. Studying the current local market increases your rental income, helps you properly manage your current properties and ensures you make better acquisitions in the future.
Go through these steps at least once or twice a year for each of your properties. Studying the current local market increases your rental income, helps you properly manage your current properties and ensures you make better acquisitions in the future.
All that information is helpful, and if you are still ready this then you're dead serious with your investment and you're right, you need need to dig deeper to know exactly how much to charge for rent. Follow these rules to arrive at the perfect price.
1. Minimum rent requirement
As I have mentioned earlier, you need to set your boundaries. For you to survive in the rental business, your rent has to be high enough to be able to afford expenses and provide cash flow.
To further help you determine the acceptable rent, take these three very important things:
a. Debt service such as your mortgage
b. Capital expenditure reserve
c. Cash flow
What often novice landlords' does is pocketing the money left over after debt service, then getting excited about their great cash flow. But eventually, something will happen maybe their investment gets trashed and they need to replace the flooring, water heater, and stove.
What they suddenly experience is that tragic feeling in the pit of their stomachs which accompanies cash flow in reverse. All of the money they thought they’d made suddenly transfers from their account to their contractors.
That's why you need a minimum rent. Prioritize CapEx reserves over cash flow to have a lasting rental business.
2. Maximum rent requirement
We are always looking to fulfill two objectives: to both protect and grow our investment. Just like there is a minimum requirement for rent, there is also a maximum. We have to be able to appeal to the widest cross-section of the potential audience. If you buy rentals that are too high within the scope of your market, this becomes difficult.
Shoot for rentals that average rent is in line with market rents. This appeals to stable, reliable tenants but isn’t so exclusive that only a tiny sliver of the marketplace can qualify.
3. Price per square meter
To truly compare apples to apples, you have to price your rentals on a per-square-meter basis. Let’s say you purchase an apartment building currently renting one-bedrooms for Php 28,000, and online research indicates the market could withstand a Php 8,000 rent increase. But how big are those property? If they’re 60 square meter, and your rentals are 50 square meter, that market research is no longer relevant even if they’re both one-bedrooms. Can you convince people, for example, to pay even Php 36,000 if units that are 10 square meter larger are available for Php 36,000 as well? Unlikely.
With the above information, you should now be well equipped to set an appropriate rent price for your investment properties. Remember, be fair, consider all. Do not rush into the conclusion that the only way to get good rent after the lockdown is to make a discount. Upgrade your means for renting out your investment properties. Photos are taken from your expensive mobile perhaps would be outdated. Prepare for the new Normal! If you are lost, don't be shy to seek support from others.
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