Many owners of rental properties devote far too little effort to figuring out the rental rates that they should charge for their units. They underprice.
Closely review the rent roll.
Critique the property, but also look for opportunities to create value.
They overprice. They don't make rent-enhancing improvements. They fail to adequately segment their tenants. They spend too much money on ineffective advertising. They devote too little time and money to target marketing. If they experience high vacancies, they blame a soft market. If they experience low vacancies, they pride themselves on their skill as a landlord.
All in all, these mistakes (and many others) flow from the same source. Property owners just don't realize the great profits they're missing when they set their rents to reflect their own personal whim or arbitrary judgment rather than market reality.
Think of missed opportunities like this. You own a 12-unit building. You underprice each unit by $25 a month. The cap rate is .09 (9 percent). How much does this underpricing error cost you?
Lost building value =
$25 x 12 units x 12 months $3, 600 per year $3, 600
You've lost $40,000 of value just by underpricing $25 per month! Move that rent shortfall up to $50 or $100 a month, and you lose $100,000 to $200,000. Make no mistake: Underpricing rents can cost you a bundle of money. Overpricing, too, can also cost you plenty. By trying to charge too much, your vacancies, turnovers, advertising costs, conversion rates (meaning that you must show the property 15 to 20 times before you find a willing tenant), malicious tenant damage, and bad debts will probably shoot up. Before you set your rent rates, inspect competing properties. Acquire personal knowledge of competing properties and competitor pricing. Then you will be able to adopt a pricing strategy that maximizes your net income (NOI) and property value.
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