Pricing Rental Homes – List Above, At, or Below Market Value?

I have to admit, pricing rental homes is an issue that I struggle with. As a property manager in Charlotte for the past 6 years, I really should have a good grip on the right approach; however, I’m still constantly debating myself over the correct way to do it. And my therapist says this self-banter does not mean that I’m crazy.So… it is safe to say that pricing is an inexact science. It is simply impossible to know what the optimal dollar figure is for any product or service. For example, let’s say you are a manager at The Gap (with the traditional logo intact). You put 5 sweaters on the rack for sale at $50 each. It takes 5 days and they all sell. Is this good? Was $50 the optimal price?You’ll never know! Maybe you could have priced them at $55 each and still sold them in 5 days. Then you would have really screwed up; retail has been a tough field to be in for the past few years and the extra $25 in profit would have really helped The Gap’s stock price! Or maybe the sweaters should have been priced at $45 and they would have sold in 1 day. In this scenario, the lower profit would have been offset by the larger saving in inventory costs. But then again, who knows? Maybe at $45 each, customers would have perceived the sweater’s quality to be less and they would’ve taken 10 days to sell. It’s tough to figure out!With rental homes, the confusion is similar. Below are the 3 pricing options available to every property owner:
Price Above Market Value: This is good if prospects will actually visit the rental; they may just look at the other rentals listed at or below market value. However, if the prospect visits and says they will take the place if the rent is knocked down a bit, that’s fine! The price can still be at or slightly above market value and the prospect is ecstatic they can tell their friends that they got a great deal.
Price at Market Value: An average amount of prospects will visit the rental and someone will take it in due time. The only issue is if the prospect says they will only rent the home if $100 is taken off of the monthly rent amount. Now the owner must decide if they want to lock into a below-market rate for a year, or roll the dice and wait for another qualified prospect. (Note: Rent negotiators usually turn out to be good renters. Unqualified or barely qualified prospects rarely try to negotiate the rental price. That takes chutzpah! It’s like getting into a bar at age 17 and arguing over the prices of shots.)
Price Below Market Value: Prospects will flock to the house and applications should roll in. Some people will still try to negotiate rent, but being that so many people are interested, these requests can be quickly (and justifiably) rebuffed. Locking into below market rates isn’t great in terms of ROI, but does provide the piece of mind of an occupied property with a good tenant (you can be choosy!).So what’s the right answer? It depends. I know that’s not an overly helpful answer, but I’m not trying to be evasive. There are many factors that need to be considered besides the obvious ones (risk tolerance and financial wherewithal of the owner). Here are a few to ponder:
If the property is 1 of 15 rentals in a neighborhood, pricing below market value could be a good point of differentiation. Conversely, if the rental is the only one in the neighborhood, it may be wise to price above market value.
If it is probable that a real estate agent will bring a tenant in on a property, the pricing should be above market value. The reason? They will probably look to negotiate the rent down. If the tenant will probably come in from an ad, pricing at or below market value is probably the best strategy because they will be focused on the list price.
If a downturn of activity is expected because of seasonality (like the Thanksgiving holiday through New Years), it would probably be smart to price below market value for the first few weeks of November. Having an empty house in November and December is going to kill the ROI; a rental reduction upfront in November will definitely have a better total net return than a month or two of extra vacancy.So the moral is that pricing rental homes ain’t easy. Different times and situations call for different strategies. One size rarely fits all!

Factors to Consider When Selecting a Home

If you have been pounding the pavement on the ‘home open’ circuit for a while and think you have finally found your dream home, here are a few questions to ask yourself before you submit an offer:1. How long has it been on the market?If the property has been on the market for a very long time – is it overpriced? Is there a catch? Do your homework!2. How does it compare with similar properties that have sold in the area?Compare your property with others that have recently sold in the same area. Are they comparable in size, quality and price? Are you getting value for money?3. Is the property located in a well performing suburb?Check out the median house price of that suburb for the past five to ten years. Has it increased steadily? If not, why not?4. Does it need much maintenance or renovations?Factor any renovations or maintenance that needs to be carried out into the purchase price of your property – don’t leave yourself short if you haven’t budgeted for renovations and repairs.5. It is structurally sound?It is always wise to make the sale subject to a favourable building condition report and pest inspection if you have any concerns about the state of the property.6. What are the strata levies or additional costs associated with the property?If the property is part of an apartment building or complex, be sure to factor in strata fees and any additional costs. Don’t leave yourself out of pocket by budgeting incorrectly.7. Is there room to grow?The property might suit your needs now but what about in five years time? Is there enough room for an office? Bedrooms for more kids? Room for the veggie patch you always wanted out the back? If not, maybe this property isn’t the one for you. You don’t want to be moving again in two years!8. What are the neighbours like?If you get a chance, pop around and introduce yourself to the neighbours and check out the presentation of their homes. You want to feel safe in your new neighbourhood, as well as your home.9. Is this the right community for me?You don’t just move into a home, you become part of the community so make sure everything you need is in reach. Are there good schools, shops, sporting facilities and recreational options nearby? If the surrounding community doesn’t offer what you need, chances are you won’t enjoy living there.10. What is planned for the area?Do your research with your local council. You don’t want to move into a new home only to find out you will have a new freeway running through your backyard in five years time. Research the area, as well as the community and the home.If you are satisfied with all your responses to the questions above, chances are you have found the right property for you so go ahead and make an offer. Good luck!