Is Setting Your Long Beach Investment Property's Rent Too Low Risky?

Mike Dunfee - Friday, February 1, 2019

Pricing rents correctly is one of the most critical parts of leasing and managing property. It’s important not to ask too much for rent, but it’s equally important not to let the rent stay too low. In this article, we will address pricing rents too low. We commonly see properties with rents priced too low, and although this happens with properties under management, it is more common to see it happen when a property is self-managed by the owner. A leading indicator of why this happens is when a property is not monitored as closely as it should be. Landlords often allow rents to remain low because they don’t want to encourage extra or additional maintenance requests. Sometimes, landlords even let their tenants make the repairs to try and save money. Lowering the rent to avoid the risk of vacancy is another mistake some landlords make, and this is a big problem for many reasons.

Lower Rents Add Up to Loss of ROI

Pricing a rental rate too low can significantly add-up over time. Let’s dive into an example here: Let’s say you have an income property with a market rent of about $2,000 per month. If you have a tenant paying $1,800 month and you are avoiding raising the rent because they have been a good tenant, or you are worried they will ask for repairs to be made or even to prevent the chance of vacancy, you could be making a big mistake. See, at $200 per month or $2,400 per year, this cost could certainly help cover any needed repairs or vacancy costs. Not to mention how quickly this loss can add up if you fail to monitor the rent for three or more years. It’s not uncommon to see a landlord let the same rent remain in place for three or more years, and in this example, you would be looking a potential loss in rental income of $7,200 or more. This loss in rental income is money that could be utilized for capital expenditures or other ongoing maintenance that benefits both you and the tenants not to mention the increased return you could have realized on your investment.

Missed Maintenance Issues

More to the matter of maintenance issues, if you aren’t renting your property at a market level, you are running the risk that the tenant will fail to report specific maintenance issues. If the tenant is hiding from the landlord to avoid a rental increase and the landlord is hiding from the tenant to avoid having to pay for repairs and maintenance, after only a few years, you could be sitting on a rundown property with significant capital improvements adding up, which can be very expensive. It’s much better to maintain the home so you can avoid long term risks. Another common mistake we have seen happen is that landlords let tenants do their repairs, and we strongly advise against that. The renovations will likely be done incorrectly, and there are also safety concerns. What if they hurt themselves? If something were to go drastically wrong, who is liable? It’s not like they are working on their house. They are in your property. Also, what happens when the relationship inevitably ends, and the tenant prepares to vacate the property; will they expect to be paid for the maintenance issues they corrected on their own? It’s best to avoid these questions altogether.

Low Rents Also Create Problems for Tenants

Having the property priced too low is merely creating a problem down the road for both the tenant and the landlord. For example, if the tenant is accustomed to paying $1,000 for a property that should be $1,500, when they move out and look for a new place to live, they will find they are not getting the same “break” they received at your location and may be forced to leave the area altogether to find lower rents. Additionally, if your rents don’t keep up with the neighborhood and you can’t afford to keep the property in top shape, you’ll attract less qualified tenants to your property further amplifying an ongoing issue.

The Bottom Line for Long Beach Area Landlords

The Bottom Line for Long Beach Area LandlordsYou have to remember these are your tenants, not your friends. It is okay to have a good relationship with them, and you should. However, you do not have a legal responsibility to your friends. You do have a legal obligation to your tenants. If you think you’re doing them a favor by not charging them the full rent and they are doing you a favor by not bothering you with maintenance requests, at the end of the day, you will find yourself with big problems. It’s crucial to actively manage your property and set the rent at the market rate, even if it means occasional vacancies. You are going to need to make upgrades and tend to maintenance requests. If you take care of your property and you take care of your tenants, they will take care of you. If you have any questions about his topic or would like a free rental rate checkup, please feel free to contact us at the Mike Dunfee Group, your resource for Long Beach Property Management.