We all try and find that golden pot at the end of the rainbow, ensuring a convenient retirement. Some do this by keeping an eye on the stock market, others do it by investing in rental properties. If rental properties are the road you choose, then I suggest you continue reading. We are going to discuss 5 of the most common assumptions new property investors make with their rental properties.
Assumption 1: Cheaper Rental Rate
A cheaper rental rate will not get you a better tenant, the only thing it might do is find you a tenant faster. Also a cheaper rental rate will influence the value of your property and also indirectly affect your entire neighbourhoods rental value. Many experts will say that it’s not smart to undervalue the rental rate of your property, simple because of the long term repercussions.
Let’s say you ask 10% less than the rental market of your neighbourhood, the result of this will be that every other rental property in the neighbourhood will seem 10% too expensive. This will in the end affect the selling price of your property and the neighbourhoods’. If you ask 10% more than the average then you are increasing the value of your property and making your neighbourhood (in general) seem like a good rental environment. I’m not saying we all should go increase our rentals by 10%, I’m simply saying that dropping your price will influence you and your neighbourhood in the long run. Lets be honest; investment properties are bought for the long run, otherwise you would be putting your money in the stock market.
Assumption 2: Lower rent will encourage tenants to call less
Wow can one be wrong about this. I find and so the experts agree that it really doesn’t matter what you ask, too much too little, a nuisance of a tenant will stay a nuisance. I have come across many landlords who actually say the tenants who pay more tends to complain less than those with the lower rental rate. Honestly I believe the rental rate has nothing to do with the matter, but rather the type of person that you are renting to.
Assumption 3: My expenses will determine my rental rate
A landlord should always consider the expenses of the property and what rental income can be from such a property. But using your expenses as a guide will result in two wrong scenarios.
Scenario 1: High Rental Rate
Expecting your tenant to pay a high rent because your expenses for the property is too high will also not find you a tenant. It is not your tenant’s fault if you bought the property for too high, or if the value of the property dropped because of the neighbourhood. These are the ups and downs landlords need to budget for in advance.
Scenario 2: Low Rental Rate
Let’s say you have already paid off the property (no mortgage) and you have little expenses to the property (an apartment), you still shouldn’t ask a low rental rate simple because the property doesn’t cost you a lot per month. Rather ask the market value, in this way you don’t cause yourself some future problems by not being able to resell the property for the correct market value.
A low rental rate will make you a nice landlord, but the long term repercussions can be more severe than estimated for you and the neighbourhood. If you want to be nice about it, rather improve the property, or give a small discount for timely payments.
Remember, tenant don’t care what your expenses are, and I understand this, they are after all renting. They are not landlords and they don’t bear the fruits of capital growth. You as a landlord can’t expect them to pay for your possible errors in judgment.
Assumption 4: I can compare rental rates to estimate mine
Comparing the rental rates within your neighbourhood is a good method to get an estimate of what rental units go for in your neighbourhood. But you can’t be sure that your property fit this assumption, for not every property is the same. I wrote a post specifically to help you determine your rental rate, please go read 5 Tips for Setting your rental rate. However a comparison is the best way to start, but you need to be fair with this. Compare your property to something similiar to yours in the same street if possible with the same features. Also get as many rental rates of your neighbourhood as possible, in order to get the most accurate average.
The best way to start is to start a little higher than your comparisons. Make sure you use all the correct marketing tunnels to get enough interest. In a small amount of time you will see if the rental rate is too high (simple by not having any enquiries). If you have many enquiries but no one signing, then you know it’s not the price, but rather the look of the property. In this case you will have to make improvements on the look and safety of the property.
Assumption 5: If all my places rent quickly and everything is rented, I must be charging the right price.
Sadly this most probably means you are asking too little rent, you should consider increasing your rental rate every so slowly and with small amounts. Having all your properties filled is always the best scenario, but make sure you are doing this in the most accurate way by keeping to market value. Remember the rental rate which you ask will influence the selling price of the property, especially if you sell it to an investor.
For more info on how to set your rental rate go read our 5 tips for setting your rental rate