Determining the Optimal Monthly Rent for Your Vacancies

Setting a rental rate is the ultimate balancing act for property managers: If the rent is too high, you risk properties staying on the market for months, with the burden of maintenance costs and taxes with no revenue to pay for it. And if you price the rate too low, you may not earn enough per unit to support the expenses.

So how do you strike the perfect balance? By combining your market research with quantitative pricing formulas. Here are five ways to do that, according to property managers:

Do your homework
Property managers need to monitor twists and turns in the housing market constantly. It’s important to stay on top of the latest multiple listing service (MLS) reports, classified ads and other resources, says Mia Melle, president of operations for Ontario-based RentToday.us. This information will give you a sense of what competing properties offer in terms of location, amenities and other features.

In the past, unrented properties were always more expensive than those that were occupied, she says. But the current economy has spun this trend on its head. “Now, we’re seeing the available properties are priced lower than the leased ones, because rental values are continuing to decline,” Melle says.

Melle focuses on properties leased in the last three months to find the price that will get her properties rented within 30 days. When she’s done researching, she prices just under the going market rate—maybe by $100 or a little more—to keep the place occupied with tenants who tend to stay because they think they’re getting a bargain.

Realize that the market drives the price
Some property managers may increase price based upon individual financial pressures. If you bought the property at the height of the housing boom, for example, and the monthly loan payments reflect that, it’s likely you won’t be able to rent it at high rates.

“Do not use your mortgage payment or personal finances as a guide,” Melle says. “Just use the facts. You need to keep looking at the rental Web sites and newspaper ads to find out what properties are going for. Then treat the transaction as a business—don’t get wrapped up in emotions.”

Come up with a formula that works for you
A good, working formula should be used as a guideline, not a cast-in-stone operating procedure that has no flexibility. Pinpointing a way to calculate the optimum price can produce positive results. Matthew Baron, a principal at Simon Development Group, has come up with a formula that calculates the net effective rate of rent at renewal time, which isn’t the same as the gross rental rate. Instead, it takes into account factors such as lost revenue from commissions, concessions and vacancy if a property lease isn’t renewed. It also takes into account some X-factors as well, such as one-month-free signing incentives needed in markets where the rental economy has gone south.

“For example, if your unit rents for $1,000 per month, that equates to $12,000 per year,” says Baron, whose New York-based business owns and manages multifamily units and other properties. “But if you have to offer a tenant one month of free rent in order to occupy the unit — and the marketing time takes one month — then your net effective rent for the year is actually $10,000, or $833 per month. That’s almost 17 percent less than what it would be if the unit would have remained rented.”

The key is to calculate the amount that makes it worthwhile to keep the tenant, without underpricing to the point that you’re uncomfortable with the profit margin. In this case, Baron says, the property manager can reduce rent by up to 17 percent without losing projected revenues in the end.

Try a simple strategy
A formula can be as complex as the property manager wants to make it, attempting to quantify factors such as market conditions, amenities, building age/wear, location, proximity to public transportation, etc. But not all managers have the time for such extensive strategizing. Oakland, Calif.-based property manager Lisa Locke has found that she doesn’t need to.

“Everyone here relies on Craigslist,” Locke says. “So we have a general idea of what properties are going for. We post a rent in that ballpark and, depending upon how long we wait, we lower it $25 every week or two until we get a hit.”

Keep the properties looking good
The properties that look the cleanest with functional utilities and amenities will rent far more quickly than those that don’t. “The nicest property at a good price will always have the edge over the competition,” Melle says.