Establishing the rental price is critical to generate returns from your rental property as an investment owner. You are in the driver’s seat when it comes to setting the right price. Your decision now will be a chief factor in your returns in the long run.
The Art of Establishing the Right Rental Price
If you’ve underpriced your property, as much as you may want to increase rent in the future, a limiting factor is local regulations. If your property is in British Columbia, tenancy regulations restrict the rent increase a landlord can apply each year. Because the government intends to preserve affordable rental housing, current limitations restrict the annual rent increase to inflation. Thus, the rent value net of inflation is kept the same year over year; ditto your intention to play catch up with rent prices in the market.
With the risk involved with pricing your rent too low, you may feel tempted to err on the side of caution and aggressively price your rental property.
Pricing aggressively may seem like a safe play. But if you’ve been in the property market long enough, you’ll begin to see the risks and consequences of pricing your rental home too high.
These are the factors and consequences that you’ll ideally want to avoid and keep in mind in pricing your property just right, not too high, and not too low.
We’ve already covered the consequence of pricing too low. You sacrifice your returns both in the short and long term.
What are the outcomes of pricing your home too aggressively?
You can seriously limit your pool of potential renters.
With the growth of online platforms for rental listings, renters can easily access and compare rental listings. If you price too high, most savvy renters will go for better deals.
You may be attracting less favorable tenants.
If you set your rent at a higher price, most qualified renters will look elsewhere for better deals. The one renter who may be willing to pay the higher price for your home might be unable to rent elsewhere. A renter with a less favorable tenant history may be willing to pay a premium price to rent. This might not always be the case, and we advocate proper screening for any potential renter of your home.
You may be limiting the longevity of the tenancies at your home.
Having a stable, long-term tenant who pays good rent is the ideal scenario. Suppose a qualified renter realizes that they are paying a premium for your home and there are comparable rental properties priced cheaper. It is almost guaranteed that the renter will consider moving out as soon as their lease is up. A financially conscious renter will weigh out the costs of moving versus paying a higher rent for their current residence. As is often the case, the choice to relocate will win out.
You might delay the process of finding a renter by a good month or even longer.
Tenants are required by law to give a calendar month’s notice for ending their tenancy.
As a result, tenants will generally give notice on or near the end of the month to take effect at the end of the next month. The last week of the month and the beginning of the month are when most tenants search and look to secure their next tenancy.
If you price too high during this crucial listing period, you might lose out on finding a tenant. You might see interest in your listing slow when most renters have already signed onto new tenancies. It may be the case that you cannot secure a new tenancy until the beginning of the following month as the current cycle of renters has already signed tenancies for the 1st of the upcoming month.
It is good to weigh out the benefits of pricing higher in the current month versus potentially facing a vacancy period if the property doesn’t rent out.
How can you establish the right rental price?
A good reference point will be comparable homes currently listed on the rental market. Every rental property is different, and it will be good to review features that will make a difference for renters and justify price premiums. Features that are important to renters include available parking, external storage, internal storage, balcony space, in-suite laundry, and amenities at the building. The unit’s size is also less important than the layout, and extra rooms such as a den or an additional bathroom add value.
It is good to review the market and have a pulse of what features matter most to renters in your neighborhood. You will first need to establish the range of prices for comparable homes. You can then make price adjustments based on the features of your home.
It’s not a make or break point if you don’t price your home correctly the first time around.
Pricing your home compared to the market can be challenging because the market is constantly changing. There may also be unique features to your home.
It is good practice to monitor the response from prospective renters and viewers of the home. An underwhelming response and lack of tenancy applications may mean that your home is priced too high.
If you are in the last or the first week of the month, it may be good to closely track and adjust your pricing to catch on to the wave of renters looking for their next tenancy.
You should be expecting a minimum of at least a few inquiries every day during this busier period. If you are not receiving sufficient responses, it’s best to adjust your pricing as quickly as possible. In this crucial 2-week period, it is best to rent out at a reasonable rate rather than potentially face a month of vacancy.
Have questions or want to get a rental valuation for your property? Contact us, and we’d be happy to provide advice.