August 22, 2011

You Should Spend Extra Time When Setting Rent on a Rental

My dad recently rented a small 2 bedroom house.    He keeps his rents very low compared to market so the renter got a very nice deal.   I help my dad by posting his ads on Craigslist for him since he does not have a computer of his own.  I know his rents are low but its been a while since he rented out this house so I checked online to see what comparable rents were.   Rentometer and Zillow both give estimates for rents. 

Rentometer - $675 Median Zillow - $677

Rentometer shows the rental median at $675 for that area for 2 bedroom units.   They say that 20% of 2 bedroom rentals are below $584 and 20% are above $750.  

The listing for Zillow on the property address says that their rent estimate is $677.

My dad had decided to rent his place for $600.   Thats not super cheap compared to what Rentometer says is out there but its still $75 below the Rentometer median and below Zillows number.     If I were pricing a rental I might be inclined to stop there after 5-10 minutes it takes to loop up the values on Rentometer and Zillow and decide that I'd done enough market research.  However there  shortcomings and inaccuracies with using the broad average numbers from sites like Rentometer and Zillow.   Those sites are really only good enough to get you in the right ballpark.     Such sites do not know if you allow pets, they can't tell what condition your property is in or if its been remodeled, they don't know any of the extra amenities your property may have that other rentals lack and they don't even seem to differentiate between single family homes and large apartment complexes,

I checked Craigslist today and there were about 220 listings for 2 bedroom rentals.   I then sorted based on units that allowed dogs.    I further narrowed it down to units under $700.   Out of those I then looked through the remaining units and found the single family houses.

2 bedrooms in market = 220
2 bed under $700  =85
2 bed under $700 within 25 miles of town = 70
2 bed under $700, in 25 miles, that allow dogs  = 32
Single family 2 bedroom homes under $700 within 25 miles that allow dogs  = 3
Single family 2 bedroom homes under $700 within 25 miles that allow dogs and which are not isn't a single wide mobile home or an obvious scam posting = 1

That single rental was listed for $645.

I then looked at the ads for rentals over $700 and sorted for just those that allow dogs and are single family homes within 25 miles and I found three 2 bedrooms.   They were rented for $750, $750 and $795.  The 3 bedrooms started at $875 and went up from there

If you want to live in a house in town and you have a dog then you have 4 choices out of today's listings:
$645, $750, $750 and $795.   The median there is $750 and the average is $735.  The Rentometer and Zillow estimates for the rents are $675 and $677.    Those are about $75 lower or 10% less than the median rents I found by actually searching listings on Craigslist.     I figure that Zillow and Rentometer are about 10% low based on my research in the market.    If you used the Zillow and Rentometer figures then you'd be pricing your property 10% lower and losing 10% of your income.

Now its quite possible that you could have found the opposite result and determined that comps in the rental market are actually higher than Rentometer or Zillow claim.   That is also very good information to know.  If you try and rent your property for 10-20% higher than market rates then you will have difficulty renting it.   This could cause the unit to sit vacant while you search for a tenant.   A vacant rental costs you money.  You could easily spend over a month hunting for a tenant to pay extra and lose rent that time.  Now its true that if you can find someone willing to pay more then the higher rent rate will make up for the rent lost during the vacancy.   But its also quite likely that you'll never rent the unit at the higher rate and will lose rent for months only to have to drop your rent later to get tenants interested.
Of course not everyone wants to live in a single family house nor do all renters care if you allow dogs.   Many renters will be happy living outside of town if it means saving some money.   But your rental is not priced to compare to the lowest common denominator.   Your rental should be priced based on the features it has.  There are people who want a single family home.   There are renters who own dogs.   Most people would probably prefer to live within easy driving distance of town rather than having a long commute.   All of these things make your renter better than other properties which can't boast about these features.

Bottom Line :  You should not rely on websites like Rentometer or Zillow alone to set your rents.   Spending more time to do some in depth market research on rental rates is well worth your time.

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