How do you determine a property's optimal rent rate?

The most important concept for a landlord to understand when agreeing to a rental rate is the trade-off between the listed rental price and the total time a property is vacant. We'll explain more below, but the basic idea is that a more competitive listing will see greater tenant demand, more rental applications, and thus on average a shorter vacancy period. A unit that is listed for a rental price that is too low may rent more quickly due to greater demand, but can cost a landlord significantly in the long run by undervaluing a property. Alternatively, placing a tenant at a higher rental rate, but with a significant vacancy period, may actually cost a landlord money in forgone rent. The good news is that you can, and we argue must, calculate some of the trade-offs in the rate-setting decision, which helps a landlord set a price that matches their individual demand for a tenant.

Squire can help analyze the fair market rental rate for a property based on the individual unit's condition and characteristics, an extensive comparison of competitive properties, and an analysis of the overall strength of the overall rental market in any given time period. We use listing prices and total time on market when gathering comparison data, but we also modify our calculation with distinct weights for different attributes. We calculate each alternative's rental price per square foot, but we then assign weights to each property based on several characteristics. For example, each alternative's geographic distance from your unit is a very important factor in our calculation (all things equal, the closer a competitive property is to your unit, the more relevant its rental price per square foot is), but we also assign a subjective quality score to that particular property so that its condition is relevant to your particular property. Our experience has shown that a mix of quantitative and qualitative factors works best, but that neither approach alone is accurate enough.

Squire can also conduct a price sensitivity analysis that helps quantify how changing a rent rate may affect the property's vacancy period. We've discussed in previous posts how corrosive property vacancy is to a property's cash flow, but in this analysis we focus on the landlord's individual approach to the listing price decision. For example, a landlord seeking to meet a mortgage obligation with an empty unit without a tenant or landlord in residence may require a different listing price strategy than a landlord looking to rent a unit in 6 months' time. We help quantify the impact of price changes in $100 rent intervals, assuming a 12 month lease term. For example, a $3,000/month fair market rent would have to see a 12.6 day reduction in the total vacancy period in order to justify a $100 price reduction (the amount of time that the total lower annual rent is offset by the reduction in time of an empty unit). We understand that for some landlords, vacancy cost is relatively more expensive given individual financial needs; Squire helps you understand the full impact of the listing price decision while working to maximize a property's cash flow.

How should landlords think about property vacancy?

Tenant vacancy is a huge cost to any landlord, regardless of the geographic location of the property. Think of it this way: with 52 weeks of rent in one full-year lease, every week of vacancy costs a landlord about 1.9% of the annual rent value.

If that doesn't seem like a lot, treating property vacancy like a finance charge (think credit card APR) helps underscore the huge cost to not renting a unit as quickly as possible. Let's run a few numbers to demonstrate the point.

Take a rental market where the listing price is approximately $2,570. The median home value in this market is approximately $520,000. The median rental unit yields $30,840 in annual rent revenue, if fully occupied. Let's make another assumption to highlight the corrosive effect of vacancy. Conventional mortgages typically require 20% down payments by property owners; for the median property we're highlighting, that would equal $104,000.

Thus in this example, a landlord borrows $104,000 in order to secure $30,840 in annual rent revenue. Daily vacancy on that particular unit has the equivalent effect of a 29.7% APR finance charge! The effect of vacancy is even more pronounced if you consider that landlords with mortgages have to use proceeds from rent to help pay principal, interest, and taxes, which obviously can't be done if no rent is collected.

One week of vacancy in our example rental unit costs a landlord $591.91 per week - and that's money that has absolutely zero economic value and no rate of return. Squire can help property owners maximize the reach and effectiveness of their rental listings.