How To Set A Good Rent Rate
Date: 3 Oct 2024
Setting the rent on your rental investment is critical to a productive outcome. Set it too low and not only will you miss out on valuable income but you may also attract the wrong tenant to your property. Set it too high and there is a very real chance that your property will sit empty while other more reasonably priced options are taken up.
Pricing Just Right
- Certainty of cashflows
- Steady cashflows
- High occupancy
- Low turnover
- Increase rent over time in manageable amounts
- Works for “me too” properties
- Attract good tenants
- Attract many tenants giving you choices
Pricing Too High
- Cashflow stress
- Non-existent, negligible or negative gains
- Loan stress as income is zero
- Higher vacancy
- Higher tenant turnover and repeated periods of vacancy
- Barrier to incrementally increase rent over time
- Property will need to be superior to others
- Attract the wrong tenant
- Attract too few prospective tenants
Property A – Priced Just Right:
- Asking rent $630 per week
- Week 1 income $0
- Week 2 income $630
- Week 3 income $630
- Week 4 income $630
- Total Income $1,890
- Plus 48 more weeks @ $630
- Total Annual Income $32,130
Property B - Priced Too High:
- Asking rent $700 per week
- Week 1 income $0
- Week 2 income $0
- Week 3 income $0
- Week 4 income $0
- Week 5 income $0
- Total Income $0
- Plus 47 more weeks @ $700
- Total Annual Income $32,900
As you can see, after 12 months, property A has had one week vacancy and has returned $32,130.
Property B has been vacant for five weeks and has returned $32,900, a $770 premium over the fully tenanted property.
This a real-world example that we see a lot of. Just browse online rental listings and you will see plenty of rentals advertised for extended periods – many weeks and sometimes months after the advertised available date. That means the property is vacant and the landlord is paying the entire mortgage and all the other holding costs. You must ask yourself if the $770 annual premium in the example above was worth the stress on your personal finances of covering all costs yourself during the extended period of vacancy.
The next problem arises when 6 months down the track the tenant gives notice as they have finally found a comparable but cheaper property to rent. In this case, especially if you remain with the same strategy of pricing above market, the potential small premium you might have had over 12 months will become a negative due to further vacancy.
We generally recommend a balanced approach that reflects actual market conditions, and considers the costs of vacancy, tenancy longevity, tenancy quality and overall annual income.
