Obtaining top market rent is the goal of most property owners. And with good reason – costs of owning a rental property have risen over the last few years and the increase in market value helps offset those costs. However, there is a difference between obtaining top market rent and overpricing a property. How so? And how does overpricing a rental actually cost you money in the end?
Listing a property for top market rent means that you have priced your property within a price point that other similar properties have actually leased for. If, for example, other comparable properties (similar size, amenities, location) have obtained a rental rate between $1500 – $1800 per month, top market rent would be $1800 / month. Of course, in an appreciating market, rental property owners may price their property a notch higher, but within reason. If trends indicate continued appreciation, this is usually not a problem. A lack of interest or activity can be remedied with a relatively minor price adjustment, assuming the property is in good and rent ready condition.
However, asking a rental rate significantly over other properties can lead to overpricing a home. Even in a strong rental market, where appreciation is occurring and inventory is slim, this is possible. While there is no set formula that can tell a property owner that their property is overpriced, the higher it deviates from comparable properties, the more potential there is for overpricing it.
How would a property owner know that their property is overpriced? Simply, by interest and showing activity. The rental market is based on how much tenants are willing to pay for rent. When inventory of rental properties is low while demand from tenants is high, properties appreciate because of supply and demand. Thus, if potential tenants are not interested in a property that is in good, move in condition with no negative internal or external factors, the lack of interest can be placed solely on price point.
Listing a property at an overpriced rate can cost a rental property owner money. Lack of tenant activity leads to accruing expenses, such as utilities and maintenance, along with lost rent. Think about it: How much does one month’s lost rent translate over the course of a one year lease? If your monthly rent was $1200, that is a loss of $100 / month over 12 months. $2400 monthly rent? That is a whopping $200 per month over 12 months. And those losses don’t include expenses incurred simply from the property being vacant.
While vacancies cannot be eliminated in the rental business, they can be mitigated. Pricing a property competitively is key to reducing expenses and finding a quality tenant within a reasonable amount of time.