How do you set the rental price for an investment property?
Unless you are active in the market every day of the week it is difficult to calculate what an appropriate rental might be. Property managers are in the market all day, every day and therefore they are able to advise you in regard to a realistic price.
Investors can be very sensitive about the rental price. In cases where it may be the first or one of the first investment properties for an investor, this is especially true, where they may not want to become involved in the process of setting the rental price.
There is a temptation to do a web search to check out other rental prices for similar properties in your area. However, often this is an asking price or promotional price which sometimes is not a true reflection of what a property will actually lease for. These prices may be skewed and give you little or no depth of understanding as to what these properties are really renting for.
Some of those properties may have been vacant for a number of weeks with little interest, with the market clearly saying the property is overpriced. Other properties may not be listed on your web search. Some properties may have been leased within one or two days of becoming vacant without ever being listed on a web search, while some properties may have been leased out quickly because of their low asking price compared to other similar properties.
Your research will probably not tell you how many people attended an open inspection for a rental property. Some property inspections can attract more than 60 people, while conversely, some open inspections can run for weeks with virtually no one attending.
While there is no ‘exact science’ to setting the correct rental asking price for your investment property, a good property manager will have access to databases and technology that the general public may not have access to. They should be able to provide you with a comparative market analysis (CMA) listing comparable properties to yours that have recently been leased and the actual leased price. This combined with the current market conditions will take much of the guesswork out of putting the correct asking price on your investment property.
These are some of the reasons why it is very difficult for a landlord or an individual who does not work in this field every single day to ascertain the price of a particular property. Particular attributes such as a garage, car parking or storage space are just a few of things that will influence price.
Is it a ground floor property with poor security or higher up where security is much better? Is the property in a noisy position? What if a large unit development has just been completed nearby a landlord’s property?
The strength of the rental market in any suburb will fluctuate over time.
Parking for residents and their guests is sometimes an important factor.
Sometimes many properties in a particular area can come onto the market at the same time and depress prices. Demand in some suburbs can fluctuate.
A new major industrial development could have a positive impact on rental prices in neighbouring suburbs due to the new jobs created. In some areas, the time of the year can have a major impact on rental prices.
There are many variables affecting the rent a landlord can expect from a property.
Why do some properties sit vacant for a long time?
If a property is vacant for long periods of time it is usually due to the asking price being above the market rental.
However, there are times when other factors could have the same effect. Some of these factors are:
- Lack of exposure (the property is not advertised well enough).
- The neighbours are turning potential tenants off the property.
- The presentation of your property. Does it need new carpet, window furnishings and paint? Do the gardens need to be cleaned up? Is it clean and does it smell good?
- Are there items that need to be repaired?
- Does it need a significant renovation?
- Are there 20 of the same type of apartments available at the same time?
As an outsider looking in, a landlord might lack the objectivity and ability to carry out meaningful research into property prices for rentals or to judge what the rental should be.
It is difficult not to become emotionally attached to our own property, and it is natural to believe that our property is the best house on the street or the best apartment in the block of flats. Our emotion can at times blind us to the way a prospective tenant will view the property. This is why it is strongly suggested that the investor relies on the objectivity of the expert property manager, who knows the current market and can advise the investor.
Perhaps the property requires some upkeep and some painting or some work in the kitchen and bathroom to bring a new lease of life into it?
Investors need to understand that they need to be flexible during the leasing process and that a property manager will try to achieve a rental on the higher end of a range initially.
However, investors may need to adjust this during the re-letting process in order to secure a good tenant within a reasonable period of time. Listen to your managing agent when they provide you with this feedback and ensure that you are flexible with the rental price.
Keep in mind that dropping the price by $10-20 per week and obtaining a tenant as soon as possible will cost you far less over a period of 12 months than letting the property sit vacant for weeks on end, all because you stubbornly want to achieve a premium figure.
As an example, if a landlord lowers the rent of a $400 per week property by $10 per week for a 12-month lease period and the property rents instantly instead of being vacant for two weeks, the landlord is actually $260 in front.
Keep in mind a little compromise can in the end generate a far superior cash flow.
Your property manager should be abreast of the types of issues that can affect a landlord’s rental and advise the landlord accordingly as to what they need to do as a professional investor.
Investors need to ensure that the managing agent is regularly updating them with feedback during the re-letting process and that they also advise you if there are any repairs or work required at the property in order to get it up to a standard to attract the right sort of tenant.
If you receive feedback that the property needs to be painted, renovated, the carpet replaced or it could do with a really good professional clean, get it done. Your property manager can organise for these works to be done while the property is vacant.
Posted: Thursday, 24th September 2009 at 5:35 pm
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