One of your biggest priorities as the owner or manager of a rental property should be maximizing its income potential. Real estate is often a substantial investment, and every rental owner will want the best return.
As with any business, profitability is achieved when a property’s income (rent) exceeds its operating costs. That’s why determining the correct rental rate is so important. But it can be a delicate balance.
Setting the rental amount too low can mean reducing your profit margin. Set it too high, however, and you might fail to attract and retain quality tenants. So, how should landlords set and adjust rental prices?
Factors to consider when setting rent prices
The main factor in determining a property’s rental price is its location. Are there local amenities that make the area desirable? Is public transportation accessible? Is the area in demand among renters? The answers to those questions can vary from neighborhood to neighborhood.
In San Jose, California, a San Jose property manager would understand the market — prevailing rental rates and local amenities — in San Jose. Aside from the specific location, other factors to consider include:
Age and condition – Newer or recently renovated properties, like larger ones, tend to support higher rental rates.
Market demand – Typically, when there is more demand than properties available, rental rates are higher. When analyzing demand, also consider factors such as seasonal fluctuations and current economic conditions.
Comparable properties – One of the first things a property manager will do when setting a rental price is research comparable properties’ rent prices. You are competing for tenants with other properties, after all.
Additional amenities – If your property offers perks such as parking, a swimming pool, fitness facilities, or maintenance and securities services, you might be able to set higher rent prices.
Costs and overhead – Possible mortgage payments, insurance, and property taxes are all costs. When setting your rent price, consider your desired profit margin with these expenses in mind.
Reasons to adjust rent prices
The most practical time to consider rental rate adjustments is when a lease is up. Financial incentives or slight price increases can help you retain good tenants. Typically, tenants expect rent increases at renewal, especially during inflationary periods. Remember that quality tenants can be worth their weight in gold, so chasing them off with large increases could be counterproductive.
Other things to consider when adjusting rent include:
Economic shifts – Again, inflation is certainly a factor to consider when adjusting rental prices, as is a potential economic downturn. In San Jose, where tech companies provide many household jobs, a San Jose property manager must consider any influx or outflux of employees.
Upgrades and renovations – If you make significant improvements to the property, it’s likely to increase the rental value.
Vacancy rates – High rates of vacancy or turnover can signal that rent is too high. Also, the overall vacancy rates in the area are usually a barometer of market demand or affordability.
Local legislation and rent-control laws – The state of California and some municipalities have legal guidelines for certain properties when it comes to increases. Call it “rent control” or “rent capping,” but it’s imperative to know the law when contemplating rent hikes.
Best practices for adjusting rent
Tenants don’t like surprises, so springing a rent increase on them can be alienating. Instead, it’s important to be transparent and let them know ahead of time what’s coming. You have reasons to adjust rent prices, and it’s not a bad idea to explain them.
Other best practices:
Regular market research – Stay on top of local property market trends. It isn’t easy to make an intelligent decision without all the current information available.
Setting caps on increases – Knowing the law and preparing tenants for reasonable increases goes a long way to keeping good tenants in your rental.
Providing value with increases – The more you can ensure tenants that tangible improvements and benefits they value can come with higher rent, the smoother your sailing will be. Making informed decisions and being fair and transparent with tenants is a solid path to profitability.
The bottom line
Appropriately setting and adjusting rent prices is vital to the profitability of your rental, so you want to take a balanced, informed approach. Valley Management Group has provided trustworthy and affordable property management services in Santa Clara, San Jose, and throughout Santa Clara County for over 40 years. If you own a rental property in Santa Clara County and need south bay property management services, contact us for a free property management quote and one free month of management services when you sign up for services.