Test your rental rates
When it comes to real estate, I see many people forgetting tried and true business principles.
I’m not sure exactly why — maybe it’s because they think real estate works differently or maybe it’s because many people forget that their rental properties are actually a business.
Whatever the reason is, I’m always surprised by this.
As rental property owners, when we’re ready to rent our properties, we generally look for comps to see what we should list our properties for.
This is the “normal” practice in real estate, and it works.
But, when you think about it, this isn’t how pricing works in most businesses, nor is this how rents grow.
Do businesses price their products solely based on their competitors?
Rarely.
If no one starts charging higher rents, because everyone is using the same comps, how will rental rates grow?
They won’t.
Someone has to be the first to charge a “higher” rent to drive up comps.
Recently I had a rental property go to market for rent — my agent, who has leased houses for me many times and was always accurate with his rental rates, told me it should rent at $1,100 per month.
Software tools I use and other data points I had indicated he was probably right.
But, I said, why not try and push it a bit? Why not try for more?
If it sits on the market for a week with no interest, I’ll drop the rent to be more in line with comps.
I convinced my agent to list it higher than he wanted to — at $1,200 per month.
Within three days of it being listed for rent, we had 5-6 showings and four applicants.
The competition increased the rents and we signed a 12-month lease with a highly qualified tenant after three days of being on the market for $1,250 per month.
That is an extra $150 per month ($1,800 per year) in pure profit. There is no incremental cost from receiving an increased rent.
I did my underwriting (deal analysis) for this property during the acquisition phase at $1,100 per month. I didn’t want to assume we’d receive rents higher than that just to make the deal look good.
The deal was pretty good at $1,100 per month, but it’s a home run at $1,250 per month.
And, we bought this straight off the MLS.
All the best,
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