You’re a property owner and you are ready to put your property on the rental market. It is in a great location and perhaps you’ve recently made some upgrades such as new paint or flooring. That should be enough to command a higher rental price, correct? Unfortunately, it’s not a sure thing. Current rental market forces play a huge role in the ultimate rental price of your property. Not pricing your rental correctly, notably holding out for a higher price over a longer period could end up costing you thousands over the term of a year lease.
As an example let’s say we have a property where the market has it priced at $3,000/month but the owner would like to get $3,200/month. It’s priced above what the market supports so it languishes unrented for a month.
| Month | Desired Rent | Market Rent | Potential Outcome | Actual Outcome |
|---|---|---|---|---|
| 1 | $3,200/mo. | $3,000/mo. | $3,000 | $0 |
Since it has sat unrented for a month maybe lowering the price will help? Let’s say the desired rent is then discounted by $100. Again, in this scenario, the property is still above the market rent. It continues to sit, unrented, for another month.
| Month | Desired Rent | Market Rent | Potential Outcome | Actual Outcome |
|---|---|---|---|---|
| 1 | $3,200/mo. | $3,000/mo. | $3,000 | $0 |
| 2 | $3,100/mo. | $3,000/mo. | $3,000 | $0 |
After two months the decision is made to finally bring the property in line with the market demand. A year lease is signed and over the course of the next 12 months rent is collected.
| Month | Desired Rent | Market Rent | Potential Outcome | Actual Outcome |
|---|---|---|---|---|
| 1 | $3,200/mo. | $3,000/mo. | $3,000 | $0 |
| 2 | $3,100/mo. | $3,000/mo. | $3,000 | $0 |
| One year lease signed. | ||||
| 3 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 4 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 5 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 6 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 7 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 8 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 9 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 10 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 11 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 12 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 13 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| 14 | $3,000/mo. | $3,000/mo. | $3,000 | $3,000 |
| Total | — | — | $42,000 | $36,000 |
In an effort to gain an initial additional $200 in rent per month (an additional $2,400 per year), the property owner missed two months of market rent (a $6,000 opportunity loss). While this is an example scenario, the impacts of lagging the market pricing are well illustrated. Rental markets are always in flux and are influenced by numerous factors such as demand, location, inventory, price, condition, seasonality, just to name a few. It’s easy to get lost in the complexity, give up and turn to a reliance on “gut feel”…a potentially costly mistake.
We are real estate professionals and devote considerable resources to analyzing the current market to help property owners maximize their investment outcomes. If you have questions about pricing your Monterey Bay area rental property or are seeking to maximize your real estate investment please feel free to reach out!