Setting the appropriate rental rate when renting your Southern Californian property can be complicated and a little confusing but it’s critical to your success as a landlord. Setting the right rent rate significantly affects your ability to find high-quality renters and the return you will achieve on your investment.
It’s, therefore, crucial to take the right approach to determine the appropriate rental rate. You need to account for variables that affect the value while cutting out the noise that does not matter. Setting the right rate is one of the most important steps in being a successful rental property owner.
In this article, we will go through the process we use to determine the rent for a Long Beach, Los Angeles, or Orange County residence. At least we will show you what we do at the Mike Dunfee Group so that you can do it too.
Conduct a Market Analysis
The first step is to conduct a market analysis. Back in the old days… when I first started, we had pagers instead of cell phones and landlords looked in the classified ads and at “for rent” signs to figure out what other properties in the neighborhood were asking for rent. We called it a rent survey.
The same principle applies today but now you can look online. The asking prices for properties currently on the market are readily available on websites like Apartments.com and Zillow.com. For even better information, you can subscribe to one of the services that provide actual rents achieved from recently rented properties.
More and more of us property management professionals are using something called an Automated Valuation Model or an AVM for rents. These AVMs use sophisticated algorithms that utilize various data points to give an estimate of market rent. Zillow has a popular consumer version.
We use an AVM that also gives some specific comps in the neighborhood. This can be a big help and we make it available free of charge for the Los Angeles / Orange County areas on the property management section of our website.
However, it’s important to recognize this is just a starting point. Never price your rent solely based on an AVM. A computer program will not know everything about your property or the comps for that matter. However, once you have a quality market analysis you are off to a good start.
Perform a Property Assessment
Now that you know what similar properties in the neighborhood are going for, the next step is to do a thorough unbiased property assessment. Ask yourself how your property stacks up against comparable properties.
Some things you need to consider: Is your property highly upgraded or could it use a little updating? Does yours have a better view or do the comps? Is your property older or newer than comparable properties? Is it bigger or smaller? Does it come furnished or unfurnished? You need to make adjustments just like an appraiser in order to come up with an accurate market value.
Be realistic when evaluating how your property compares. Resist the urge to look at the comps as a way to justify how you can charge more than other landlords. You need to be brutally honest with yourself and look at it through the eyes of a potential renter.
Once you have an honest and realistic property assessment comparing your property with the most relevant comps you can adjust to coming up with your best estimate of the market rate.
Strategically Set Asking Price
Now that you have determined the true market rate for your rental property, it’s time to set your asking price and you will want to be strategic about it. Too high of an asking price will not result in you achieving more total rent. Too low of a price might mean you are leaving money on the table.
The very best strategy may vary slightly depending on the market, your property, and how many units you have to fill. However, we usually recommend setting your initial asking price competitively, meaning at or slightly below the market rate for best results.
There are multiple reasons why competitively pricing your rents is the best strategy. For one, any money you may theoretically gain with a high asking price will most likely be lost by a longer vacancy time. Most importantly, when you ask for too high of a price, the applications you end up getting will likely be from prospects who were turned down everywhere else.
To put it another way, pricing your rent competitively will reduce your vacancy time and get you a bigger pool of qualified applicants to choose from.
Adjust the Asking Price If Needed
If you follow the strategy of pricing competitively while effectively advertising your rental property in our major metropolitan market, including Los Angeles and Orange Counties, you should have applications within a couple of weeks at most.
If not, you may have miscalculated the market rent, the market could have changed or you were trying for a little more and did not get it. You just don’t want to be guilty of staying at the same high asking price for too long.
You should know within a week or two if you are priced right or not. If not, then you need to take another look at your asking price to fill your vacancy. Don’t make the mistake of holding on and waiting for a miracle. Price it right.
Your Expenses Are Not a Factor
The most common mistake landlords make when pricing rent is trying to take their expenses into account. Your expenses do not affect how much rent you can get.
Of course, you can charge more rent than the property across the street if yours is better. However, prospective tenants do not care what your mortgage payment is or what your operating expenses are. They only care about how it stacks up with other properties on the market.
If your property can rent for more than your expenses then good for you. If the market rent for your property does not cover your expenses, then it’s your loss and not the tenant’s problem. You may be able to take the loss on your taxes. You should consult a tax professional about that.
Whatever you do, don’t try to find some way to cut corners, or ask way too much and end up vacant for months, or worse yet, take on some bad tenants. Either accept the monthly negative for a long-term hold or re-evaluate whether you should rent or sell the property.
Consult a Real Estate Professional
You can have all the data in the world but there is no substitute for consulting a real estate professional. We always have a property manager tour the property and look at the numbers before finalizing what we ask for rent.
They will have the advantage of having been in other properties on the market. They will know firsthand how yours compares. They will know what matters most to tenants. They will also have the benefit of the most current data available. Most of all, they are not as personally connected to the property. This puts them in a better position to give an unbiased, yet informed opinion.
Choosing the appropriate rental rate for your Long Beach property is crucial for your success as a landlord. Start by conducting a market analysis. Then, perform a realistic property assessment so that you can strategically set your asking price. Once you are on the market, you should adjust your asking price if needed. Please remember that your expenses are not a factor affecting how much rent you can charge. For best results, consult a real estate professional.
We at Mike Dunfee Group can offer professional guidance on determining the appropriate rental price for your home. We have a team of skilled real estate experts, and the knowledge and experience to support you in making wise choices to achieve your rental objectives. Contact us today to learn about our property management services!