SJA Property Management is a leader in the property management industry serving the Puget Sound area including Redmond, Bellevue, Kirkland, Seattle, and surrounding cities. Today, we want to talk about pricing your rental. This information can apply to the first time you put your property on the market, or to the renewal rate you want to settle on when a tenant’s lease is up.
Rental Rates Affect Vacancy Rates
It’s important to keep vacancy rates as low as possible. One month of vacancy equals about eight percent of your gross rental income. Let’s take a look at how that affects your bottom line.
Increasing Rents: An Example
If you currently have your property rented at $2,000 per month and your tenant is set to renew the lease, perhaps you want to raise the rent by $150. Maybe you think that’s what the market can give you in additional rent.
So, whether you’re renewing your tenant or putting your property on the market for the first time, you’ve decided that you’re going to price it at $2,150 rather than $2,000.
With this new price, you may face an extra month of vacancy. Either your tenant will move out or it will take you longer to find a tenant willing to pay that price. You would rent the property quicker at $2,000 per month, and your current tenant probably would have stayed and renewed the lease at that amount.
Because you raised the price by $150 per month, you found yourself with an extra month of vacancy. If you do the math, you’ll see that it’s going to take 13 months at the $2,150 price just to break even and make up for that month of vacancy.
So, keeping the price at $2,000 would have been more profitable for you. This example doesn’t even factor in the costs of turning the property. There are expenses associated with a tenant moving out. You may have to replace carpets or repaint. Getting the home ready for the next tenant costs money, and you’ll have to spend anywhere from $500 to $2,000.
Raise Rents Strategically So Tenants Don’t Leave
Think about this when you’re putting your property on the market for the first time. Price it so you can rent it quickly. You don’t want to leave money on the table, but you also don’t want to overprice the home. Otherwise, you lose money in the long term.
When you’re doing renewals, don’t increase the rent so much that your tenants move. If your tenants do move, you’ll incur a vacancy, and even if you get the higher rent, it will take a long time to recoup the loss of income.
This is how a vacancy rate drives investment performance. If you have any questions about your rental rate or anything pertaining to the management of your investment property, please contact us at SJA Property Management.