The longer your rental unit sits vacant, the higher your stress levels tend to rise. At a certain point, you may be asking yourself if you should reevaluate what you’re charging for rent. In the next two posts, we’ll discuss two scenarios when you should be looking carefully at the amount you’re charging for rent as well as offer suggestions to help you decide what you should ultimately charge.
Scenario #1: Evaluating Rent Rates at Lease Renewal
A good time to evaluate rent rates is when a resident’s lease comes up for renewal. You should be really careful here though because you could end up sending your resident packing if you come across as too greedy.
For example, say a resident has been with you for two years and during that time the market rate in your area has skyrocketed 10 percent. Even though rates have increased, and you may be tempted to adjust your rates by the same 10 percent, it’s not a good strategy if you want to retain your existing resident.
Why? Because it feels greedy to them, and they’re going to shop around for a new place even if it ends up being more expensive and stressful for them in the end because you’ve now left a bad taste in their mouth. We’ve seen it happen time and time again.
Instead, what you want to do is set a renewal price that’s somewhere between current rent and the maximum current market rent. You want to set it as high as possible without that resident moving out. Here’s why.
Every time you have a vacancy, there are heavy costs associated with it. Not only are you not collecting rent during that time frame, but you’re also incurring the costs of turning over the unit as well as taking on the risk of an unknown tenant. With every new tenant, there’s a slight risk of them going bad. Maybe they won’t take care of the unit, maybe they’ll get evicted, or who knows what. If you have a good tenant already, there’s inherent value in retaining that known commodity.
How to Set Renewal Rates
When you’re selecting a renewal price for an existing resident, you have to bear all these factors in mind. What are the costs of turning over the unit, how much will you lose during the vacancy, and what risk are you willing to take on with a new tenant?
Consider these variables as you assess your market and feel out your resident’s history at your property. How long have they been there and how happy do they seem? Then, come up with a guesstimate that is as high as you think the resident is willing to pay. If they come back and ask to negotiate the rate, you should seriously consider doing it, especially given all the expenses that go into losing the existing tenant.
If you have questions about setting rent rates in San Francisco Bay Area, please give our team a call at 415-417-1812. And read the other blog we published when we discuss a second scenario when you would want to reevaluate rent rates – when your existing unit is sitting vacant.
Scenario #2: Evaluating Rent Rates When a Property is Sitting Vacant
Setting the market rent on a vacancy is a little more straightforward than it is when setting rates on a renewal because you can look to the marketplace for guidance. In essence, all the listed units are the supply and all the people looking for places to stay are the demand. From there, you can do a market rental analysis of the comps in the area and come up with a price that makes sense for your property given what you know about the current market conditions.
A word of caution when setting rent rates, however. Some people have this idea that they’re going to set the rates really high in order to get “good” tenants. Unfortunately, that isn’t always how things play out.
The people who are great tenants on paper those who have strong credit scores, no criminal history, no eviction history, etc – can include those who are looking for a deal. They’re shopping around, they’re getting to know the market, and they are knowledgeable and have no intention of paying more for a similar property they can get elsewhere.
Discerning, high-quality tenants are going to pay the absolute minimum rent for a high-quality space that fits their budget and needs. This is the kind of resident you want to stay in your property. Ones who intend to stay a long time, take good care of the place and pay rent on time.
The people who are willing to pay more can actually become bad tenants. These are the people who may a criminal history or an eviction on their record, and 90 percent of landlords won’t rent to them at all. They may be willing to pay almost whatever it takes just to sign a lease and be done with it. It’s nearly certain that if you’re asking way above market rate, you risk only getting bad applications.
How to Set Fair Market Rates
Setting your asking rent at a fair market price or even slightly below will help to get you the high-quality applicants that you’re looking for. Moreover, once they move in, they’re much more likely to stick around because they trust that they’re paying a fair price.
If you did happen to secure a resident who agrees to pay a slightly higher market rate, guess what? They’re going to catch wind that they’re overpaying and, as soon as they’re able, they’ll be back out and shop around for a better place to live at a better price.
To hear more from us about how to reduce vacancies in your rental properties, reach out to us please.
If you enjoyed this content and would like to receive more like it, please send us an email at info@TheSFPropertyManagement.com. We’ll add you to our mailing list. Please check out our blog page for more content: https://www.thesfpropertymanagement.com/blog/. TheSFPropertyManagement is a full-service property management company that specializes in residential single-family and multi-family properties in the San Francisco Bay Area. If you are a tenant searching for an apartment, please contact TheSFPropertyManagement today at 415-712-0507 to discover the available options that best suit your needs. Similarly, if you are a homeowner seeking a property management company to take care of your property, kindly contact us at 415-417-1812 for assistance.
