The rental market has been on fire, and rents are spiking. In some markets, like Denver and Seattle, it seems like the sky is the limit — that tenants will stand in line for a rental no matter the price tag.
As a result, some landlords are shooting high on rent.
It’s true that a landlord who sticks with the standard 3-5% percent increases seen five years ago may lose out on profits in today’s market.
Yet, landlords also must take care not to price the property too high — because that will attract the worst tenants. And, that can derail a rental business in no time flat.
Just as borrowers with poor credit are destined to pay the highest interest rates, tenants with a bad history wind up paying the most rent. It’s a simple process of elimination. There is a finite set of available vacancies. The best tenants are going to shop — and score — the best deals. The applicants who are left are forced to pursue the properties that the good tenants have passed on.
So, before you throw your dream rent figure out there and wait for tenants to line up for the property, consider this: The rent you set has a significant impact on the quality of your tenants.
When the rent is too high, bad things can happen:
1. The best tenants don’t apply;
2. Landlords concerned about a prolonged vacancy bend their standards on tenant selection and tenant screening; and
3. Bad tenants –who aren’t planning to pay anyway — will apply for the vacancy, especially if the property remains vacant for awhile, or if the rent ultimately is reduced.
The optimal rent should be at market, or ever so slightly below, to present a perceived bargain for the better-qualified tenants. That can be a challenge to determine in such a sizzling market, so you’ll need to do your research.
Many landlords advertise on free online classified websites. Even lenders use these figures as a good indicator of market rent. The sheer volume of ads on free sites can make easy work of research. However, do watch for a couple of things:
First, these ads are used by scammers, and rental housing is one the biggest areas where that happens. To pull it off, these scammers have to work fast, so they will advertise a ridiculously low rental rate. You won’t have time to run down the scam, so simply throw out any figure that seems out of sorts with other listings.
Likewise, some landlords will shoot for the stars with their rates, and maybe lower the price if they don’t like the response. Those figures likely are higher than market and should be given less weight. By the way, lowering the price later not only attracts predatory tenants who sense desperation, but it raises suspicions of discrimination if you scared away initial applicants only to allow someone else in at a more affordable rate.
Don’t overlook paid-for rent classifieds. These are as just as effective — if not more effective — in filling vacancies than the free ads. Moreover, these paid ads tend to be produced by professional property managers who often have a better handle on what tenants will pay, and what price point attracts qualified tenants, making this information highly valuable. One thing to keep in mind, however, is that these prices may be set by “corporate” in another state and will reflect a national, rather than local average. Also, with larger properties, any rent increases tend to be factored over several months. If the market is inflating suddenly, that formula may be too low.
The trick to researching the right rent is being objective about comparisons. You must be realistic. Your property may be bigger, but not offer the same convenience or popular amenities like smoke-free housing. Square footage alone doesn’t take into account preferable layouts or use of space. Location rules, but so do security features, peaceful enjoyment, and high-level landlord service.
Once you have chosen a rent figure, be smart about your own advertisement. Tout the benefits of the property so that you can maximize the perceived value for rental applicants. That attracts good tenants.
If your rent is set too high, that may become apparent when you begin tenant screening. It may create more work than it’s worth. Look at it this way: If your dream-rent figure is $100 a month over market, you stand to gain $1,200 over a year’s lease. Balance that with how much you will lose if your property is vacant for a month while you sift through unqualified applicants. How much will it cost you if your tenant damages the property, or fails to pay rent?
When the market is good, landlords generally are more susceptible to problem tenants who may exaggerate qualifications. A hot market is all the more reason to run tenant background checks — because it’s a bad time to have your property out of service while you try to boot a bad tenant.
This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).
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Disclaimer: The information provided in this post in not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.