One of the first things an owner must determine when renting his property is the lease price of the rental. Often, owners base this amount on their costs plus profit rather than an analysis of the market. As a result, they typically price it incorrectly. While the costs associated with the property are a factor, they are not what ultimately determines the rental amount. Rather, the market determines what the property is worth at any given time. In this current economic environment, this is especially true. A common statement from owners usually goes something like this: “My mortgage, taxes, and insurance on the property total $1,000 a month. I need to get at least $1,100 to cover my expenses plus a little extra for a rainy day fund or profit.” Well, that is great if the market is willing to pay that amount for the property, but it isn’t normally the case. Worse yet, what if the market is willing to pay $1,500 a month for the property that the owner just priced at $1,100?
An owner can cut himself short by calculating the lease price based on cost alone in 2 different ways.
First, he could sit on a vacancy for a long time before finally reducing the property to the market rate and getting it leased. For example, if he priced the property at $1,100 and it sat vacant for 4 months before he determined it should be priced at $1,000 per month, he has just spent $4,400 of his own money to find out that he can only get $1,000 a month maximum for the property. Even if he found someone who was willing to pay $1,100 a month for the property, it will take him 44 months to recover the cost of the money he paid out waiting for that tenant willing to pay the “over market” rate.
Second, if the same property is worth $1,500 a month in the market and the owner has decided to price it at $1,100 a month because of his cost plus formula of pricing, he will probably rent it right away but will also give up $4,800 difference on a year’s lease that he could have had in his pocket.
The correct strategy to price a rental property comes from analyzing the market to determine what similar or identical properties within the area have closed at in the last 3-6 months. Anything longer than 6 months back does not reflect the current market. Additionally, you should not use other properties that are available for lease to determine a rental price. While you do want to be aware of what is currently on the market, the prices for available properties varies wildly and do not reflect what tenants are willing to pay for a rental property. Rather, these prices only reflect what owners want to get for their properties and may or may not be realistic. Frequently, I hear owners say they get on the Internet and check out Criagslist or other advertising venues and determine their pricing based on what they find. This doesn’t work because it doesn’t tell them what actually leased. It only tells them what a variety of owners want for their rentals based on whatever correct or incorrect formula they came up with. It also will not tell them if these advertised properties ever lease or at what price they finally went for.
The best avenue to determine your rental price will always come from the closed property market.
When I have a property that is new to our company, or one that is coming up for lease after a tenant move-out, I first determine the important features of the property including number of bedrooms and bathrooms, square footage, presence of a garage and/or basement (finished or unfinished), recent updates, lot size, property type (ranch, bungalow, colonial, house or condo, etc.), and overall curb appeal. I take those features and plug them into my various searches to see what very similar or identical properties in the same area as mine have closed at in the last 3 to 6 months. I also use a variety of sources to search including the MLS and our extensive in-house database. Once I have all of the similar or identical closed properties narrowed down, I plug my property into the mix and see where it falls. I will adjust slightly up or down depending on any extraordinary features of my property or the comparisons and determine what the property should rent for. Typically, many owners do not have the time or access to the sources a professional property manager has to do the comps and thus find themselves either “winging it” or relying on the review of websites used to advertise vacancies when determining a rental price. The bottom line is, tenants don’t care what an owner’s costs are, whether or not he owes too much for the property, or whatever his problems may or may not be. They are looking for a nice place to lease that they can call home at what is a reasonable price for the area. And they will pay what the market rate is, every time.
Author: Service Specialties, Inc.
Service Specialties, Inc.. located in Mt. Clemens, Michigan was founded in 1981 and is owned and operated by Catherine Bott (President). Service Specialties, Inc. has managed thousands of properties over the years. Our services currently cover single-family homes, multi-units of varying sizes, apartment communities, office, retail, and industrial buildings as part of our portfolio of properties.With over 25 years of experience and expertise in the management and real estate business, we are able to provide our clients with programs that exceed their expectations, maximize the value of their investment, and present information that gives them a thorough understanding of their financial position in their properties. Our Mission Statement Provide first class property management services to our Owners and Tenants so that our clients' property values are safeguarded and enhanced.
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