The simplest, most effective way to increase your revenue is to increase the rent you charge. But increasing rent price can prove costly – fewer tenants will be interested and your property may lie vacant for longer than you’re comfortable. To increase rent price, it’s important that you first justify that increase. There are two ways to do it:
- Evaluate your market to determine if you’re charging enough for your units in their current state
- Invest in improvements to your properties for which tenants are willing to pay more
You’ll notice this is not a bulleted list; it’s in order for a reason. Before embarking on any improvements, be sure to research rental rates other landlords in your area are getting and for what quality and type of unit. Start here because it’s low hanging fruit, but also because it will help you determine what types of improvements will provide you the highest return on your investment.
For example, if you realize that properties that list off-street parking as an amenity tend to rent for $100 more per month while properties that have a covered back patio tend to rent for $25 more, you can weigh the cost of adding an awning vs. purchasing and paving the empty lot next-door.
As with all businesses, understanding your market is key to optimizing your business. So like any good landlord, let’s start with evaluating real estate in your area.
Tips for Evaluating Your Rental Market
Getting an accurate picture of your rental market is one-part intuition and two parts elbow grease. If you’ve been in your market for a while, you probably have an intrinsic understanding of what most landlord’s charge and what most renters are willing to pay. If not, you’ll want to connect with folks in the area that do have that understanding. But no matter what, don’t trust the instinct alone. A little bit of effort and research can provide you a great deal of insight and better equip you to charge the correct rental amount and invest in the right improvements.
Make a Spreadsheet
The first thing you should do is create a spreadsheet. This will be the backbone of all your research. It should include addresses, number of beds, number of baths, square footage, rental price, and amenities at a minimum. We’d also suggest including information like other fees charged, security deposit amount, and the source from which you collected the information. This spreadsheet will be instrumental in any analysis you do in the future, so make sure it’s laid out well and easy to understand.
Next, it’s time to start filling your spreadsheet with data. The best place for you to get started is the same place most potential tenants start: online. Zillow, Craigslist, Apartments.com, or whatever website people in your area use to find a place to live will be a great resource to get a feel for what landlords are charging for rent. One thing to keep in mind: no landlord lists their property for less than they ultimately rent it for – it usually goes in the opposite direction. Take this into account and discount the amounts listed by 5-10% (depending on your market).
Hit the Streets
While most landlord’s list their properties online these days, there are plenty that still only post a sign in their front yard and call it a day. These people often also have a history in the market and have some great insight to share. Drive around, write down the numbers, and call them up! Find out their listing price but also pick their brain. They could end up being a great ally.
Network with Local Landlords
Speaking of connecting with other property owners, a great way to learn more about your market is to join local real estate groups and business organizations. Get to know those in your community. They’ll prove to be your best resource as you attempt to keep your ear to the ground of coming and going trends.
Connect with a Realtor
You’re not selling your property, so it may feel counter-intuitive, but consulting a realtor can be a great resource. They’ll be able to consult the MLS which often has data that can’t be easily found anywhere else. What’s more, realtors sell to real estate investors, so they’re intimately aware of rental amounts as they relate to cap rates, cash on cash return, and other important rental metrics. Realtors often also wear a second hat as investors themselves, so may have first-hand experience.
Create Pricing Tiers
To understand rental prices and how much you can charge, it can be useful to think of your market as a series or pricing tiers. Once you’ve collected all your data, analyze the spread in price and group properties by their price per square foot. It’s important that you create these groups based on pricing alone. There will be some outliers – a landlord who has terribly overpriced their run-down property, or others who could increase their rent – but by collecting a substantial amount of data and focusing on price, you’ll find the market tends to balance itself in aggregate.
As a result, you’ll find that the bottom tier consists of poorly kept properties that are not managed properly, or those whose owners have not updated their pricing since they first purchased their property. In the top tier, you’ll find well-managed, often (but not exclusively) newly updated properties, and the latest amenities.
Next, it’s time to ensure that you are not an outlier. When placing yourself into a tier, it’s now time to ignore price entirely. Focus only on the qualities of your unit: beds, baths, amenities, etc. Place yourself in a tier as objectively as you can and take a look at the price of your tier neighbors. Are you on the high end of your tier range, or the low end? If you’re on the low end of the range for similar properties, you might have a good opportunity to raise your rental amount. If you’re on the high end and you tend to have a hard time finding renters, you probably found your answer as to why.
Improve Your Property to Increase Rent
The intent of creating a tier list is to help you identify pricing ceilings. If you find that your rental price is at the top of a pricing tier (a “ceiling”), likely the only justifiable way for you to increase that price is to improve your property. Take a look at the group of properties one or two tiers above you. You’ll see some consistent patterns like off-street parking, in-unit washer dryer, or outdoor recreational space. Pay attention to how each of them appears to impact their rental price and estimate how much effort and money it would require to offer the same. High ROI improvements should be targeted first.
The list will likely be unique to your market, so it’s hard to provide too much specific insight, but there are a handful of improvements that tend to be universal in their appeal and value. Below are articles we’ve written that outline the ROI you can potentially get from various improvements:
- Improve Your Existing Property to Increase Rent Price
- Adding Fees to Increase Rental Revenue
- Implement High-Tech Features to Increase Rent Price
But remember, it ultimately comes down to your market. If you’re already the highest price in the top tier of your market, there probably isn’t much room to go up. Markets tend to have an allowable range in rental price with very few renters comfortable going beyond that range. It’s likely not worth the effort to make improvements if they’re going to limit your rental pool so severely that it creates vacancies. Lay a good foundation of knowledge and understanding so you can make the smartest follow-on investments and improvements possible