As a rental property investor, the rent a tenant pays determines the profit you make on your investment. However, property owners must avoid charging too much rent for fear of losing a good tenant. So how do you strike a good balance?
You might already apply the standard practice of simply increasing the rent by a fixed percentage each year. However, is this sound business practice? The experts at our San Antonio property management company have insights into how (and when) to set the ideal rental rate.
How to Set the Ideal Rental Rate
As we mentioned, many property owners raise the rent on their properties by a pre-planned percentage each year. However, from our experience, there is a better method for setting an ideal rental rate.
The next time you must adjust the rent rate on your rental property, consider running a comparative market analysis first. This is a superior way of setting a competitive rate that will keep your tenants happy and help you reach your investment goals.
What is a Comparative Market Analysis?
A comparative market analysis is a tool that real estate professionals use to estimate the market value of a property by comparing it to similar properties in the area. Information on what nearby properties are charging for rent and what renters are paying is considered.
Factors that Affect Rental Rates
Calculating a reliable estimate of a property's rental value is challenging. Numerous factors come into play, including:
- Location (rental rates differ from neighborhood to neighborhood).
- The age and condition of the property.
- Square footage of the house, as well as the size of the lot.
- The number of bedrooms and bathrooms.
- Quality and age of the appliances.
- Features, such as swimming pools and secure parking spaces.
- The view (garden vs. parking lot) and the floor level will also impact the rental rate.
- Rental supply and demand in the area.
External factors such as the inflation rate and the local and international real estate market will also play a role in what individuals can pay for rent.
Comparative Market Analysis: How To
A comparative market analysis can seem time-consuming, but the best property managers know it's worth the effort to find the ideal monthly rent amount. To conduct the analysis, you must gather information from similar rental properties in the neighborhood. Here is the process in a nutshell.
1. Evaluate the Neighborhood
Have there been any infrastructure upgrades in the past year? Is the neighborhood starting to show its age, or have there been revitalization efforts?
2. Identify Comparable Properties
Comparable properties (comps) will be of a similar size (square footage), have the same number of bedrooms and bathrooms, and be in a similar condition (distressed, renovated, or original). If the property is a single-family home, the lot size will be a vital point to consider.
The property's amenities should also be similar. Otherwise, one must adjust for them. The number of days a property has been on the market (DOM) can indicate a price set too high or that the property has a flaw.
3. Create a Comparison Spreadsheet
List all the data that you have found on each of the comps. Calculate the price per square foot of each of the comps. Then, get an average per square foot price and multiply that by the number of square feet of your property to get an idea of a comparable monthly rent.
The right property manager will apply the same strategy when setting the ideal rate from the start with a new tenant or when first taking on the management of your property.
Comparative Market Analysis: Advantages
We know a rental market analysis sounds like a lot of work. What is the value of going to this effort to calculate the ideal rate increase? Using a rental analysis instead of a pre-determined percentage means that you are setting a renewal rate based on current data.
A comparative market analysis can help you set a more fair and competitive rent increase. When your property rents at comparable rates for the area, this will help you hold on to good tenants for another lease term. When renters renew, you save money without the need to market for new tenants, prepare the property for a new renter, and deal with costly vacancy periods.
Raising the rent can be a touchy subject with tenants. However, providing a comparative market analysis as supporting evidence for why you are raising the rent can help them see that the rental property is still fairly priced (so there's no need to move)! Not only does this make you come across as more professional, it leaves very little room for discussion and emotion.
Are Rent Increases Necessary?
Yes! Rent increases are very necessary. Rate increases must not only ensure your profitability, but a property's rental income must also be in line with the expenses required for ongoing operation. When calculating how much you must raise the rent, check on the current and projected costs of the following:
- Property taxes
- Maintenance costs
- Property insurance
- HOA dues, if applicable
- Property manager fees
These expenses often increase over time, so ensure the rental rate adjusts accordingly.
How Often Should You Raise the Rent?
The maximum percentage and frequency landlords can increase monthly rental rates are typically governed by rent control laws. However, in Texas, there are no rent regulation laws, except in the case of a disaster or epidemic. In other words, no state-wide law limits how much a landlord can increase monthly rent when the lease is renewed.
However, a property manager will recommend raising the rent once per year. A good time to effect a rent increase is with the lease renewal or when a new tenant moves in. For lease agreements renewed annually, we advise informing your tenants of a possible rent increase ninety days before the lease renewal is due. This gives them the opportunity to budget and plan for the increase.
On average, an increase of between 3% and 5% is deemed fair. However, running a rental market analysis will tell you if those percentages make sense for the market and your property. For example, in the past year, the monthly rent for Americans has increased by 4.8%.
A Property Manager Helps Set Competitive Rental Rate Increases
Clever landlords know that high rents are not the only route to good profits. Hiring a San Antonio property management company to oversee your rental properties can save you time and effort and help you attain your investment goals. The best property manager has all the information and technology to calculate fair monthly rent fees at their fingertips.
Reach out to MHN Properties to learn how we can help you retain good tenants and set ideal rental rates!