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Why pricing your rental property at "top dollar" could cost you in the long run

Today we're going to be taking a look at why renting your property at top dollar could actually end up losing money in the long run. One of the questions that we get from owners when they're getting ready to rent their property is “how much do you think I could probably get for rent?”. If you're looking at an investment property or you're looking at renting out your current home and maybe moving out of state or moving into another property it’s going to be important to know how much you can probably rent the property for. 


How do we determine value? Step one is simple. It's the same process that sales agent determines the value of a property when they get ready to list a home for sale. You will look at similar properties and get an idea of what they've rented for and extrapolate your price from there. 


So imagine that your friend Norm's house around the corner just rented for $2,500. It's a three-bedroom, two-bath home around 2,000 square feet. As matter fact, so is your house. It’s the same same floor plan 3 bedroom 2 bath right around 2,000 square feet. Chances are the properties rental market value is probably about the same. 


Now imagine you said “we'll wait a minute I know Norm hasn't updated his kitchen since 1985 and we just recently did a renovation in our kitchen”. Certainly that could be a factor in the pricing of the property. We usually tell property owners that factors like views and upgrades are things that tend to be a bigger factor in the sale of a property. Property buyers are usually more willing to pay for those upgrades so that they don't have to pay to upgrade the home after purchase. 


Tenants tend to have a little bit of a different view. They're really looking for a property with the appropriate amount of space in the location that they want, perhaps in the school district that they're looking for. There tends to be a little less concern about upgrades at least in terms of if they're willing to actually pay more for those upgrades. Often times we let owners know that properties that have been updated tend to rent more quickly, but you can’t really depend on a certain higher price for those upgrades.


So step 1 (a rental market analysis) is the easy part of pricing the property. It’s what we would say is the SCIENCE part of the process. Here’s the part that is more of an ART.


Shifting your thinking


When an owner goes to sell a property, no question about it, they want to sell at top dollar to the individual who's willing to pay the highest price for that property. When you looking to rent your property, that may not be your primary concern. This is the part that of the process that requires a little bit of a shift in thinking.


When you sell your property, that's transaction. You have all the papers side, you're going to hand over the title to the property and the day that it closes, the day that those funds show up in your account, your worries about that property are over. That new buyer takes over and you can take your funds and throw them out on the bed and roll around in them like a Hollywood movie. You're done. You no longer have a concern about that property. The transaction has been completed. 


When you rent a property, the very first day that a tenant moves in is the beginning of a long-term relationship. Typically a 12 month relationship if you have a 12 month lease. Because this is true, it’s very important for you to carefully select the individual who's renting your property to make sure that everything goes smoothly.


We often tell property owners that when you rent your property, whether it's your home or it's a property that you specifically purchased to rent out, no matter what, you've become a BUSINESS OWNER. You own an investment property that for all intents and purposes is your business. Because this is true, the best way to look at tenant selection is the same way that you would look at hiring an employee if you had a business and you needed to hire a key employee for. You need to make sure that everything in your business runs smoothly on a day-to-day basis. You're going to look for somebody who has great qualifications, has a perfect resume, shows up and just in aces the interview. You want somebody that you know that you can rely on! 


The same as going to be true when you are selecting a tenant to successfully complete a long-term lease. You want someone who has great credit, whose past landlords rave about them and say they were paid on time every single month.  That the tenant left the property in good and they never had a complaint from the homeowners association or from a neighbor. 


The truth of the matter is that the same way a great employee can really look for a high salary, great vacation package, great work environment, highly qualified tenants can really go out and shop. They know that they're in demand. They can go out and look for a great price, a property that's in fantastic condition in exactly the area that they want that's because they're highly qualified. 


If you're hiring an employee and put out an employment at out that says “this job pays minimum wage, you're going to have to work 50 hours a week, you never get a vacation, you’ll be dealing with a high stress environment” you’re probably not going to atrract the most highly qualified prospective candidates for your job.


The same is true when you go to rent your property. If you price the property at the very top of the market, or worse, $250 over what your old friend Norm's house rented for you're going to find the folks that you attract are probably not the folks who are out there really shopping, the ones who are the most qualified. In a highly competitive rental market you're probably going to find the folks who are willing to overpay are the folks who haven't been able to get an accepted application on other properties. 


Maybe their credit history is not so good or perhaps they owe a past landlord money or maybe they've had an eviction. They're in a situation where they're willing to at least say on the front. End that they're willing to overpay for the property. The problem becomes the fact that you're starting a relationship.


If you’ve overpriced you property it’s much more likely that when the tenants move out there will be damage to the property. It's much more likely that you'll have lease violations or authorized pets or unauthorized occupants. And it's much more likely that you have issues with neighbors and with the HOA.


The part where this translates into a loss of profits is the part when the tenant vacates and leave the property in not-so-great condition. It’s going to take you a little while to get the property ready to re-rent. That's down time and the vacancy is costing you money. Or, even worse, your tenants pay the inflated rate for the first three months and then, all of a sudden month four rolls around and there’s no rent payment. That's an eviction waiting to happen. 


So those are situations that are far less likely with a great, highly qualified redisnt who came to you with great reviews and fantastic credit. We really encourage you check with a professional property manager to help you determine what the best possible pricing is for the property, in a way that will not only maximize your profit potential but also really give you the ability to attract a great tenant. The other thing that a property manager will have is a publicly available rental screening criteria that they can put out in the world so that folks who are interested in the property know exactly what you're looking for, whether it be a certain credit score be a certain amount of verifiable income, rental history verification from past landlord etc. 


When you properly screen your tenant you have a much greater likelihood of attracting that fantastic tenant who's going to pay on time, take care of the property and leave the property in great condition.

 

If you're considering hiring a property manager we always remind you we're here to help you can find out more about us at www.ralstonteamproperties.com. You can also email us at info@ralstonteamproperties.com. Or give us a call 619-746-6547. We hope this video was helpful thanks again for watching.

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