How Do Landlords Determine Rent?

How Do Landlords Determine Rent?

"Keeping rent at market level is part of the landlord's duty," advises Landlord.com. If he charges less, he is essentially throwing money down the drain. If he charges more, he is likely to lose tenants and incur a high vacancy rate. Market level is basically what everybody else is charging for a comparable unit -- comparable in location, condition, size and amenities.

Comparables

    Comparables are the rents charged for units that are similar in location, size, condition and amenities to the unit you plan to rent. A smart landlord does one or several comparable surveys before setting rents. She scans online rental listing sites, visiting at least some to verify comparability, and often follows up with the landlord after the listing is taken down to verify the final price accepted for the unit. A landlord may also contact other landlords and property managers to inquire about their rents and vacancy rates to obtain comparables. Additional sources may include reports done by local planning agencies, brokerages or property management organizations.

Supply and Demand

    In some cases, especially when the unit or units you rent are unusual or different from most other units in some way -- it comes with a private lake, includes an artist's workshop in a separate structure, has 23 bedrooms or a restaurant-quality kitchen -- the concept of supply and demand may work better than comparables, simply because you will not find true comparables. The only way to arrive at a market-rate rent is to test the waters with a listing on the high side of what you think the property will bring and lower it over time until it is rented.

Vacancy Rates

    Real estate teachers and writers Walter Huber and William Pivar advise in their book "Property Management" that if a vacancy rate is under 5 percent, rents are too low. What they suggest a landlord look at is the "combination of rents and vacancy factor that will result in the highest net." This strategy works best in properties with a large number of units because even a short-term high vacancy rate in a small building can have a dramatic effect on rents and the landlord's ability to cover his costs.

Rent Control

    Rent control is a local law limiting how often and how much a landlord can raise rent. Most rent control ordinances include "vacancy decontrol," which allows a landlord to bring rents up to market rate (or whatever rate she chooses), when the unit is legally vacated. If you have rent control in your area you must first determine whether vacancy decontrols apply. It is also very important not to underestimate starting rents when there is vacancy decontrol because once the lease is signed, your ability to raise rents will be limited.



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