No matter where you buy a rental property, you do it with one thing in mind. This is turning your investment into a form of income. With this in mind, the typical thought is to set the rent as high as possible in order to make the most money. While this might sound right, you could very well be doing yourself a disservice and end up losing money.
The Wrong Idea
It is safe to say that a huge percentage of property managers and investors truly believe that the best way to maximize their ROI is to set their rents at the highest possible level. To the experienced property manager, nothing could be further from the truth. If you plan to use this tactic to make the most money possible, you could soon find yourself at the other end of the scale.
There are three very good reasons why this tactic is likely to fail
Of all the expenses the investor or property manager must deal with, vacant units are the most expensive. On average, most rental units will stay vacant for approximately 28 days. That’s a full month of zero income. Typically, the higher the rent, the longer a unit is likely to stay empty. From one week to several months, every day your property sits empty because you have set the rent too high, its money that is not going into your pocket.
Rent to Income Ratio Too High
The higher you set the rent, the bigger the bite, it takes out of your tenant’s discretionary income. This can lead to problems such as tenants who find themselves facing a choice between paying the rent and paying a medical bill or for vital car repairs. More renters than ever are finding themselves facing problems like this, the end result of which is often leaving you holding the bill.
High Rents Attract Low Tenants
The best tenants are those who lean towards being fiscally sound and frugal. These are the people who plan carefully, budget their money carefully, and are always in the market for a good deal. They spend a lot of time doing their homework and looking for the best value for their money. Those who are already financially strained, they tend to overspend and are not financially sound. Most tend to make rash decisions and impulse purchases without concern for the consequences.
This same principle applies to the type of rental home they choose. Often, they rent homes that are out of their price range. In turn, when you add this to their spending habits, the first thing that doesn’t get paid on time or at all is the rent. Which leaves you with tenants in your property who are not keeping up with their end of the contract and the possibility of an expensive eviction.
As you can see charging more may not be your best choice. A much better choice would be to set your prices a little lower in order to ensure you have quality, reliable tenants in your property, helping to ensure you a steady flow of income.