Our 5 tips to analyze when balancing revenue with Tenant success and what constitutes market rent with one of your largest assets!
DISCUSSING RENT ON APARTMENT AND HOUSE RENTALS
I've heard this so many times! "Should we be making more cash flow each month?"... "Are we below market rent for the area?"... "We need to increase rent to pay the monthly expenses." "We need to add more bedrooms to bring in more income." There are numerous scenarios that will drive you nuts when you try analyzing your investment property based on what you're charging to what the market is suggesting. Having years of experience in the Real Estate market being a sales agent, to running a full-service Property Management company for the past 10 years in Kingston, ON, and having the opportunity in buying and selling a number of investment properties, (not to mention, I was once a Tenant!) I feel as though I have a good understanding on the important aspects Landlords should use to 'feel right' about the amount of rent they are receiving from their Tenant and how this plays a smart strategy overall.
The winning formula that I've found success in is finding a balance between your specific property and personal needs and what external factors are currently at play in the economy and your local market. Below, I will explain 5 points that I feel need recognition to hopefully allow Landlords and potential buyers looking for property rentals the idea that sometimes, overcharging above the market rent, may not always be a good thing.
Tip #1 - Are all Professionals considered Experts?
The idea of not always taking face value advice from professionals is somewhat of a pain-point for me and can be counterintuitive. All professional services are in the business of making money, they have too! We all get that.. But sometimes you must consider taking their advice with a 'grain of salt' too. Take for example, a Real Estate Agent assisting you in buying an investment property. Attractive neighborhood, well-built, and lots of potential. You get advice that the house can rent for $3,500.00 per month + utilities. You work out your hard costs and WOW, you're making $1,000.00 per month profit on paper (without a Lease and without finalizing financing). Here's the issue - - Unfortunately, the advice you received was over-inflated and the 'right' market rent was actually $2,850.00 per month. If you were lucky enough to obtain financing over this valuation, your bottom line will most definitely be affected. Property Management Companies can also be to blame too! Some companies will entice you and pull you in to sign a contract based on over-valuing your rent. They'll promise you certain types of Tenants and X amount of dollars, but in reality, you could be falling into a trap. This can cost you money that you weren't planning on and will touch on the affects of this in later points. Both Realtors and Property Management companies are great at what they do, but as a prudent buyer/Landlord, you need to also do your due diligence.
We see this quite a bit after Clients come to us asking for help and being frustrated. The old saying of "don't put all your eggs in one basket" can be taken here as don't rely on just one opinion when finding out what rent you should be charging. During the due diligence stages, contact multiple property management companies to obtain a market rent appraisal' and take the average.
I bring this up as a cautionary point to be aware of. Professional services are extremely important and working with someone you trust will bring value to you and your property. But you want to ask the right questions and do your homework. All professionals working with you should know what your short and long term goals are.
Tip #2 - Analyze Market Trends and Comparable Properties
VIEW YOUR COMPETITION IN THE MARKET!
You can usually get a pretty good idea just by browsing local rental resources online. Depending on where your property is located, sites such as www.kijiji.ca, www.rentals.ca, www.realtor.ca or other local property management company listings are extremely helpful. In addition, if you're focusing on student rentals, for example, you may want to browse there housing program sites. Our company, www.limestonepropertymanagement.ca, has helpful tips and listings that you can browse for our local area.
Other considerations include, what kind of developments are going up? Are many properties opting for facelifts and renovations to increase rent? How far is your property to certain attractions or facilities that your target Tenant would value? These factors play a large role and often get overlooked because in a sense, you're competing with other rentals on the market.
Tip #3 - Short and Long Term Goals
Based on where you're at in life will also determine the 'right rent' you'll want to receive. There are many examples I can provide that explain this is one of the most important topics to discuss when renting out your property. Some Owners plan to move back into their home and only care about covering their living expenses and ensuring a quality Tenant is placed. While other Owners are close to retirement and value quality Tenants over qualitative measures.
An example of this is my parents! At the ages of mid 60s, they are travelling more and value less stress. They also have worked hard in their life to benefit now from lower household expenses for their rental properties and don't see a need to charge market rents. They value quality Tenants who take care of their properties and allow them the freedom to travel and provide them a peace-of-mind. In comparison, maybe you're younger and just getting your first rental and have the 'buy and hold' strategy where you value cash flow. In this circumstance, maximizing rent would be the goal and working with a trusted Property Management company to evaluate options, would be the right direction.
Tip #4 - Focus on Lowering your Turnover Costs
The idea of trying to get the highest possible rent is great for your return on investment, but can also turn into a negative. I say this not to scare people, but from our experience, we've seen the highs and lows and the good and bad on the topic of what type of Tenants you attract when asking above market rent or Landlords wanting to be greedy.
We've found that Tenants paying these higher then normal costs are less likely to stay longer-term and will find other options which are more reasonable. This creates additional advertising and leasing costs, not to mention, vacancy loss if unable to re-rent right away. In addition, in our experience, we also find these types of Tenants demand more from the Unit/property. There seems to be some level of expectation that the more they pay in rent, the more maintenance and repairs the Landlord should be doing. As a Property management company, one of our jobs is to vet these calls and find a balance between what's fair and not. However, there still lies the possibility of increases service calls. The last mention is turn-over costs related to damages or wear and tear. Reducing the amount of turn-over will drastically help your bottom line by not having the obligation to drywall patching and re-paint, cleaning costs, etc.
Tip #5 - Time of Year - Does Seasonal matter?
Yes! Your market rent will depend on the time of year you decide or need to re-rent your Unit. It also plays a factor when deciding who your Target Tenants are. For example, in Kingston ON, it's a big University City and Most, if not all Tenants, will secure a Lease for either May 1st or September 1st dates. When renting to young professionals or working families, there are still seasonal times to consider. For a family, most like to secure something prior to school season. For most other Tenants, you will want to try to stay away from Christmas season and colder months, as most don't like to move during these times.
If you're caught around these times, think about doing some renovations or updating.