As most investors rely on rent to take care of their expenses, how can they make sure to set a rental rate that will allow them to thrive in the market and ultimately grow their portfolio over the long term?
While setting rent sounds easy enough, experts strongly encourage investors to engage property professionals in order to maintain good cash flow and serviceability throughout their journey.
According to Eezirent’s Diane Bukowski, one of the best ways to determine the right rental price is by looking at comparable properties in the market.
“You can get a real estate agent to do this but be prepared for the hard sell of the agent trying to get the management listing, or you can get an appraisal online but be aware that you are providing free property and personal data that can be sold to marketing companies,” she said.
Further, the rental price will always be subject to the current level of supply and demand in the area, she said.
What to avoid when setting rent
Ms Bukoswki outlines the most common mistakes that landlords and investors make when setting rent:
1. Automatic rent increase
Ms Bukoswki reminds investors that rental price should always be in tune with the “current market”.
That being said, they must learn to avoid the habit of taking the existing rent and increasing it by a certain percentage without assessing the current market, especially if the property has had an extended vacancy or a long-term tenant decided to move out.
Good investors are always in touch with the current status of the ever-changing property market, according to her.
2. Refusing to decrease rent
Smart investors are willing to decrease rents if that is what the market dictates.
Often, the lack of tenant applications means that rental rate could be way higher than what the market demands.
Refusing to decrease rent may cause negative impact on the portfolio as the damage of an extended vacancy is likely to be greater than simply cutting down on a couple of bucks worth of weekly rent.
“Every week a landlord holds out for their desired price is a direct and expensive hit to the return on investment,” Ms Bukoswki highlighted.
3. Comparing apples with oranges
When looking at comparable properties to help come up with the right rental price, Ms Bukoswki advised investors to use properties in the same location and with similar features, including the number of bedrooms, bathrooms, and car spaces, as well as the age of the property and surrounding facilities.
4. Using rent to recover expenses
Contrary to popular belief, setting rent is an economic decision, not a mathematical one.
According to Ms Bukoswki: “The monthly cost of the property investment to the landlord cannot be the basis of determining the rent. There is no point setting the rent at $450 a week because that’s the amount needed to pay the interest payment on the loan.”
“The tenants do not take that into account when making their economic decision to apply for the property. In fact, they don’t care."
At the end of the day, Ms Bukoswki strongly encouraged property investors to think like tenants instead of landlords.
According to her, the keys to an accurate rent is to review the the current market, use free online tools available and start with a broad search of comparable properties before narrowing it down to specifics.
Her final advice to investors: “Listen to the market when the property is advertised and respond to what it is saying.”