Becoming a successful landlord involves a great many things. Everything from buying the right house at the right price, to putting the right finishes in the home when you get it ready for a renter to making sure it is marketed correctly; it seems like everything is important. There is one factor that stands above all others to success and even has the power to correct previous mistakes . . . and that is marketing the home at the correct market rate.
Why, you ask is it so important?
Let’s look at what marketing a home at the right price produces:
1. A large number of applications – simply put, more applications equals a better chance of finding the right person to rent your home. Remember any “sales funnel” begins with driving traffic in the big end of the funnel.
2. The right tenant – bad tenants (and any un-creditworthy person for that matter) are used to paying more money for services. Think about payday loans and “buy here, pay here” car lots. Logically, doesn’t it make sense that someone would pay more for a service if they didn’t have many other choices?
3. A long term tenant – to some degree this is the right tenant I describe in the previous point, but think about this . . . What happens if you get a good tenant at above market rate? They typically leave after a year when they realize their friend down the street is paying $200 less for a better home. So even if you find the right tenant, you lose them quickly and have to spend the money to get the home ready for a new tenant.
4. The right income – what happens if you under rent the home? If you can believe it, we see this too. Under renting a home doesn’t allow you to maximize your income.
Ok, so you’ve bought in to the fact that finding the right market rate is painfully important. We are going to look at some ways to do this from a practical standpoint, but first let’s understand the mentality of a renter . . .
A renter, unlike a buyer, is very much a snapshot in time thinker. If you were purchasing a home, you would make a list of all the things the house needs that are non-negotiable, make a list of items that are very important, and then make a list of the “would be nice’s”.
If it is one list or three, it is a long list. Renters typically have a very short list of non-negotiables and once they are able to check those 5-8 boxes, they pull the trigger and rent.
Buyers also are willing to look for homes for a long time and the decision making process can drag out.
Not so much with renters.
I always joke, if a buyer calls at 8 am to see a house and doesn’t get a return phone call till 5 pm, there is no way they’ve already purchased a home.
Under the same set of circumstances, if a renter were to do that, you are wasting your time calling them back at 5, because they’ve already applied, been approved and moved into the home by then.
While this is a little bit of an overstatement, the point remains true . . . renters work fast and don’t typically search out historical rental data.
Now that you understand the mindset of the renter, let’s take a look at some ways for figuring out market rate:
1. Be objective
None of the below ways of finding market rate work without you at least making an attempt to look at your home objectively. All the memories you have at the home will drive the value of the home up in your mind. Do your best to remember that a renter doesn’t care about YOUR Thanksgiving in the living room, they care about THEIR Thanksgiving in the living room.
2. Don’t estimate rent based on your mortgage payment
We talk to a lot of potential clients who say, “I need to rent it for x, because my mortgage payment is y”. The renter doesn’t care about your mortgage payment. If this logic was true, you would rent it for free if you didn’t have a mortgage. Remember renting your home at market rate will ultimately get the most money in your pocket.
3. Search the websites of reputable property managers
Local Birmingham Alabama managers whose sites you can search are Alabama Rental Managers, Decas Group and AHI Properties. Look specifically for your area and for homes that are your competition. The best thing to do is to pretend you are a renter and you are choosing from your house and the closest one to it. Basic supply and demand says that if your house is similar and priced a little less, you are more likely to rent your home first. If your home is BETTER (remember to be objective) and priced at or a little higher than the next home, then your home will rent next. Very simple logic, but very important to remember.
Zillow has something called a rental “Zestimate“. This is Zillow’s way of figuring out how much the rent on your house should be using some sort of proprietary algorithm. Our experience has been that homeowners typically think their Zestimate is way too low . . . and it may be. However, prospective renters are looking at this number and believing it. So, the rent you are asking shouldn’t be too out of line with what this number is or renters will just pass you by. I do believe these Zesitmates are becoming better the longer they’ve been around and the more (and better) data that the company collects; but I also believe they are a bit of a self-fulfilling prophesy.
5. “By the bedroom” areas
The last item to point out will not have to do with most people, but there are certain areas of town like Crestline Park, Homewood and Crestwood where large amounts of transient people live. By transient, I mean they are only living in the house for a certain amount of time while they are attending school or taking their first job and only intend on being in that home for three years or less. These areas have a habit of being priced, “by the bedroom”. Which means the majority of renters here are roommates and are sharing the gross amount of the rent two or three ways. Thus, a home maybe too expensive for a family to live in, but could be easily broken up into ⅓’s and paid for by three students, netting you more money. If you are attempting to lease a home in an area like this, this is something you should definitely consider.
Finding market rate is not an easy task.
In fact, it is one of the hardest things we do. If we have to error, we error on the side of renting for too much because we can always come down . . . but make sure it isn’t way too much, because you are just wasting your time.
What does a home at market rate look like? Let’s take a look . . .
- A large number of leads – whether this is a phone call or email, homes at market simply drive more traffic. Driving leads is really the first step in aforementioned sales funnel.
- Lots of showings – This is where I think most people breakdown in the process. Remember that lots of showings is to your benefit. If it doesn’t lease on the first 5, keep showing! I’ve seen far too many people wear down at this point and accept the wrong applicant. If you are showing a lot, it’s working.
- Multiple applications – While leads are huge and showings are huge, ultimately someone filling out an application is the first sign of commitment. If you are showing a lot and not receiving any applications, that is typically a sign that you priced the area correctly, but there is something wrong with your house. We call this the “price versus product” test. If you aren’t getting applications find out why people aren’t applying. The answers fall into two categories – things you can change and things you can’t change. If it something you can change, like painting a purple bedroom, I highly suggest doing it before the next prospective renter comes through your door. Things you can’t change are like a busy street or steep stairs. The only way to fix this is in the pricing of your home. Bottom line, if they are showing up and then not renting, they are telling you, “I’m willing to pay this much money to live in this neighborhood, but not willing to pay this much money to live in your house.” You need to find out why.
Always keep in mind while people are moving down this funnel that it is a funnel and you will drop people along the way. However, understanding what a market rate home “looks like” or produces is very important. We actually count each step in the sales funnel and find out who we lose along the way and provide that data to our owners. The number of showings and the number of applications are delivered to our owners weekly, along with some average statistics to help them make good decisions about the market rate of their home.
If I had to name only one thing you should get right, this would be it.
It is so important to find the market rate of the home to find the right tenant and have a successful experience. The owners that come back to us after leaving us will typically say it is because we find the best tenants. . . not that we are the cheapest.
Use the above help you find your right tenant. Staying disciplined to the process will yield you overwhelmingly successful results.