Forecasting Rental Income:
Establishing rent prices can be tricky. It is less of a science and more of an art. It is hard to explain why one house will rent for $100 more than a comparable house across the street. It is even more difficult to decipher that information if you do not know the local market.
I probably don’t need to harp on this point, but it is worth emphasizing: understanding what a particular property will rent for is crucial to accurately calculate a return. If the numbers are off, the estimated profits will be off as well.
In order to accurately price the rental amount on my recent purchase, I had to find out as much data on the local rent prices as possible. In order to do that, I pulled information from several sources.
Here are the sources I use(d):
- Zillow.com: Side note – Don’t use Zestimates!!! I know it is tempting, but I haven’t had much luck aligning my rental prices with the Zestimates.
Rather than going off of Zestimates, I typed in the zip code and searched only for rentals in the same neighborhood as my new property. This gave me an idea of what my competition was pricing their rentals at. I noticed that the more desirable properties were renting for about $1100-1200. The houses in rougher areas were renting for $900-950.
- Craigslist: I probably use this website more than I should, but I have found it to be a huge asset in learning the local rents and analyzing my completion. In pricing this property, I tried a few different formulas:
Landmarks – If my property is close to a particular landmark such as a college, hospital or golf course, I’ll type that into the search field to find a match.
Zip code – In addition to searching for competitors’ rent prices by landmarks, I also run another search based on zip code. Be familiar with neighborhoods within the same zip code and observe how that affects the cost of rent.
Street name – Lastly, I’ll search by street name and major cross streets. Sometimes I get lucky and find a comparable rental on the same street.
- Rentometer.com: I compiled all the information I obtained from both Zillow and Craigslist and came up with a median amount of $1050 per month for my property. I took that number and checked it against Rentometer.com. Based on information obtained from the site, it looks like $1050 is a fair price to list my rental at.
[UPDATE: The property has been on the rental market for a little under two weeks. During that time, two other homes have popped up on the market for the same price point. In an effort to make my property stand out, I’ve dropped the price to $1025.]
- Talk to my property manager: Lastly, I discussed the rental price with my property manager to see if he had any additional insights about the market or my listing price. At the end of the conversation, we both agreed the property was priced properly, so we put it on the market.
Two additional thoughts on rentals properties
- Pricing: After learning the local market rent, I like to divide the range of possible rental prices and price my unit at the lower third of the market. For example, the subject property in this post had a range from $950-1200. In order to expose the property to the maximum amount of potential tenants, I priced it at $1050 (now $1030). The goal for me is not to squeeze every possible last penny out of the rent, but rather to find the best possible tenant for the property. If I priced the house at $1150, I could probably rent the unit out eventually. The problem is it might take several months before the right tenant agreed to that price.
- Best product: A mentor once told me that the key to keeping properties rented is having the best product at the best price. The idea here is that people want a deal, and tenants are no different. Before I put any of my rentals on the market, I spend a little extra cash on the front-end to make the unit more desirable. This doesn’t mean that I install granite counter tops, but I do switch out dated hardware and light fixtures, paint the interior a neutral beige, and replace carpeting where needed. When I first started buying rentals a little less than three years ago, I had hardly any competition. At the time, I could pick the best of the REO litter, so to speak. Several of my first purchases cost me less than $1000 to make rent-ready. However, the market has changed. There is a lot of new money floating around and with that, less inventory and more rental competition. In order to make my properties stand out and rent fast, I have to do a little more work and make sure I buy in desirable parts of town.
Wrapping it up
After reviewing the various resources, I priced my rental at $1050 (now $1030) a month. In the past two weeks, the property has been shown roughly 15 times. We’ve had a lot of interest and positive feedback, but no one has filled out an application yet.
I’ll be monitoring the activity on this property closely in the coming weeks and will adjust the price or add incentives (more to come on this topic) to get the unit occupied faster. Remember, dropping the rent by $25 is cheaper than skipping out on a month’s worth of rent while holding out for a higher figure – essentially, that’s an 8% loss for the year! Look at the bigger picture and be flexible as needed.
Next week, I’ll discuss how I calculated the estimated returns on this investment.
Please feel free to share any comments or thoughts below.
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