Charge Market Rent!
By Kevin Estes
Renting for Less Than Market
Many clients who own investment real estate undercharge for rent.
Few things can improve profitability and cash flow like a reasonable price increase. A change may lift profitability for as long as someone owns the home. It also raises the value of the property for investors looking to buy.
Several states and cities control how much rent can rise. Failing to charge market rent can depress income for years - even decades - especially in a time of high inflation.
Impact of Pricing Appropriately
An additional $200 a month is an extra $2,400 a year.
Invested at an 8% annual return, $200 a month could grow to almost $119,000 over 20 years!
Pricing a rental right may have lifelong benefits.
Could Impact Keep vs. Sell
A couple I recently met rents to their parents. They were shocked when I showed them how much under market their rent is.
You see, their cost for the rental hasn't changed much, although the market has. Between appreciation and higher interest rates, the monthly expense of buying a home in their area has skyrocketed.
Those higher costs have driven up rents.
The couple was planning to sell their rental soon. Now, they're reconsidering.
Not Helping Tenants Long-Term
Charging below market isn't doing tenants any long-term favors. By charging market rent, an owner has more funding and accountability to maintain the property.
When it inevitably comes time to either remodel or sell the property, tenants will probably need to move.
They could be in for a nasty surprise on how expensive rent is.
Could Impact Life Decisions
We decided not to buy a home because of our great housing deal.
Unfortunately, our landlords got divorced - hopefully not over our rent!
The husband needed to move into "our" home as soon as possible.
We didn't have time to buy and wound up renting another home.
1. Determine Market Rent
What is the market rent?
Rental estimates on websites like Redfin and Zillow are good places to start.
Another source is local listings.
Asking people who live nearby their opinion can be invaluable.
2. Plan the Adjustment
The next step is to plan how much to adjust rents. Check state and local laws for any caps on how much rent can rise.
At the very least, owners are required to give tenants enough time to have options. It's the right thing to do.
3. Meet with Tenant(s)
Finally, meet with the tenants.
Bring facts and a lot of empathy.
Mention property taxes have risen.
If needed, show tenants comparable rental listings.
Then, price appropriately.
If you’d like help earning market rent for your property…
Disclaimer
In addition to the usual disclaimers, neither this post nor this video includes any financial, tax, or legal advice.
