How do you properly price a home for the rental market? Watch Nicole St. Aubin, broker, as she discusses properly pricing an investment property, and read our article below as she answers this question.
First, let’s talk about how not to price your Pensacola area rental property. We have two main types of clients, first time landlords and Pensacola investors. Both, while may have different short and long-term goals, are looking to make financial sense of their investment. We certainly understand that. Our goal is to maximize your income, but experience tells us that we cannot base your rental rate off of any of these factors:
- Your monthly mortgage payment and expenses
- What you feel it’s worth
- A cap rate you used in your investment analysis
- Active listings you saw
- Rents in other markets
- What your friend told you he rented his place for
We will take into consideration most of these factors, and more, but using these strategies are not how you successfully price your property.
First, you have to consider current market conditions. Real estate is hyper local and ever changing. Certainly, in the last few years, we’ve seen record rents with year over year increases 10-20% in the Pensacola area since 2020. However, recently, we’ve seen a slight dip in rents with small price declines in August and September, a huge increase in inventory, and a large jump in days on the market. Current market conditions are constantly changing and need to be evaluated often in order to factor into your rental rate. Here’s a few factors we look at when determining pricing:
- Local vacancy rate
- Average days on the market
- Saturation rate and average supply of inventory available
Even something as simple as the time of year your home will be available for rent makes a large difference. The best time to rent your home is usually spring and early summer. Unfortunately, we are in the “seasonal slowdown” during the months of October, November, and December and rents decrease as days on the market increase.
We also want to consider your need for income in pricing strategy. Typically, we provide a rental range when pricing your property. If you need the income immediately to make your payment, you should consider going on the low end of the range.
Next consider your property. How’s the location and surrounding area? Is the property in good condition? Are you open to accepting pets? All of these factors go into factoring your rental rate. Pet friendly homes do tend to rent for a little more and a little faster. Similarly, homes that have been remodeled and are in good condition can command a significant increase in rent over properties that are not. In Pensacola, many investors came in to buy homes and remodeled them over the past few years to increase rents. Your home cannot be compared to these homes. Consider if you have old carpet, wallpaper, lighting, or need fresh paint and make some upgrades to your home if you want a higher rental rate and to make your home more competitive.
We often see owners comparing their home to properties that a real estate agent or appraiser would not consider to be like-kind. Like-kind properties must compare number of bedrooms, bathrooms, amenities, year built, and location. Typically, properties are comparable only in a small radius or even the same neighborhood. While we do look back as far as 6 months, we adjust rental comps for current market conditions and prefer to use only 3 months.
We use the Pensacola Multiple Listing Service to get the most accurate data, but we also use other rental sites like Zillow. We do caution against looking at active rental listings though, as these do not reflect actual market data. We only look at rented comps, to see what has rented and how many days on the market, to consider pricing. One of the biggest mistakes we see when homeowners price their property is to consider only active rentals. As these properties have not rented, we cannot consider this accurate data. In fact, last week, nearly 20% of property owners with rental properties dropped their prices in the Pensacola area. Landlords have definitely been overpricing their properties for the current market, and are having to reduce their prices in order to rent their home. It is good to review active listings in the neighborhood, as these properties are your competition, and you should know where you are priced among your competition. We also look to see the number of available alternatives as well as how many are in a certain neighborhood. For example, right now, there is an oversaturation of newly construction townhomes in a certain recently completed neighborhood. Because there are 8 active townhomes for rent in this community, owners are having to drop their price to get their property rented before their neighbors.
The dangers of overpricing are great. In addition to loss of rent, vacant property owners may also have to pay power, water, lawn maintenance, cleaning, and worry about issues like possible vandalism or issues with their homeowner’s insurance company. Overpricing leads to an inevitable price drop and costs you more money than it would have if you priced the property right. Tenants and buyers tend to think there is something “wrong” with the property when it’s been on the market too long. Additionally, your tenants will realize they are paying over market value and will be more likely to break their lease or to move at the end of the lease term to a more affordable, better alternative. This just leads to more expenses. Thus, we recommend pricing the home right to secure a quality tenant in a timely manner.
Take a quick look at the math of overpricing:
Property listed at $2,400 - vacant 2 months with no activity, eventually reduced to $1,900 and leased immediately. Total rent collected for the year is $19,000.
Property listed at $1,900 and rents within 2 weeks. Total rent collected for the year is $21,850.
While it’s easy to think you are “losing” $400 a month, it’s easy to see that you lose more with vacancy than you do with any increase. Trust our agents' analysis of the market, and tenant’s feedback of your property, and reduce the property right away when activity is slow. Even better, price the home right initially.
Unfortunately, we do see property owners that have to pay monthly to float the property as the monthly rent does not cover all expenses. This will be true if you purchased the property when real estate prices and interest rates were very high. We’ll do everything you can to cover your expenses. While we want to get as much rent as possible for you, our goal is to find a quality tenant at market rate as that will lead you to better financial outcomes, especially over time.
Realty Masters is the largest single family leasing company in the Pensacola area. We lease a home every day in Pensacola. Let us our experienced Realtors help you price and lease your home. We offer full service management services and one time leasing for property owners who want to manage on their own. Request a free market analysis for your rental home here: https://www.pensacolarealtymasters.com/pensacola-property-management and let us know how we can help you meet your investment goals.