How to Price Rental Units
Pricing a rental unit is important for real estate investors. It starts when searching for a property to purchase; the amount of rent a property can bring affects the value of the property as an investment. Even after owning a property for a while, pricing trends can change and investors will want to adjust to keep up (or down) with the market.
Since the value of a rental property is primarily driven by the price of rent there’s a different strategy for different positions:
Buyers often look for properties that have undervalued rental prices. This way, after they purchase the property, they can gradually increase rents (only at the time of lease expiration) to improve property value and gain equity.
Sellers often raise rents prior to listing a property, this way there is more perceived value. It’s a great strategy for a seller to get top dollar. However, buyers should be cautious of this, because it’s best not to buy an overpriced property.
Long term hold investors will want to be priced real close to the going rate. They want to be competitively priced in the market, but still earning a good return on their investment.
How do we price our rental units? We invest based on a buy and hold strategy so we try to be very near average for rents. This way there’s a large selection of good renters, we can retain those renters, and at the same time we are making a decent return. Although, we do try to minimize rental increases on quality tenants in good standing.
We value the rental units just like we would value a house, based on comparable properties. One of my favorite websites for doing this is Rentometer. With this site you enter your address and the rental amount, Rentometer then tells you where you are in the spectrum of rentals in your area. It also shows you other rentals in the neighborhood.
Craigslist and Zillow are other good tools for comparing rent values. Craigslist is great because you will see tons of advertisements from other landlords in your area. It’s easy to find a quick comparison of similar properties that are on the market for rent. Zillow on the other hand is a calculated guess at what a property would rent for. Zillow’s rent values do not reflect reality since they are not usually properties that are actually available to rent. It is however a good quick gut check to see if you are in the ballpark.
Amazingly rental vacancy in the Madison area is down to 2%. This means that rental units are in high demand and prices are going up. Thankfully there are a few developers started to build new apartment buildings. This should help level things out, as a quick run up or decline in the market is never good long term. A slow steady increase at the rate of inflation is about where we should be.
We will have a duplex rental on the west side of Madison available on July 1st if anyone is interested.