Why are Days on Market and Rental Rates Both Increasing?
We have been keeping up with shifts in the market for years. If you subscribe to this blog, or are a Client of ours, that’s not news.
Recent data from the Metropolitan Indianapolis Board of Realtors (MIBOR) suggests a recent shift in the rental landscape. Some recent numbers suggest that investors in the Central Indiana market may be getting a bit too ambitious with their rental pricing.
Average Rents and Days on Market (DOM) throughout Greater Indianapolis are both increasing. Now that’s some news worth discussing.
After historic increases in rents over the past few years, we understand that it can be tempting to keep raising rates. However, as the days on market climb, we are concerned that some investors may become too stubborn for their own good.
Here are 4 insights for how to make the most of your investment when it comes to rent rates, days on market, and the expense of turnover for the Central Indiana market.
Insight 1: The Current Rental Market Landscape
The real estate market is dynamic and hyper-local.
Rental rates in Central Indiana have been steadily increasing over the past few years. As we looked at Q2 and now Q3 of 2023, we find Indianapolis even setting an all-time high for rent rates, with an average monthly rent of $1,474.
While this might not be surprising, what’s more interesting is the simultaneous rise in DOM.
This might sound counterintuitive at first, but it raises important questions about investor behavior. Are they holding out for higher rents, and if so, at what cost?
Insight 2: The Psychology of Pricing
To understand the rental market’s dynamics, let’s take a step back and consider the psychology of pricing.
When homeowners decide to sell their properties, their motivations can significantly influence their pricing strategies. If they’re highly motivated, perhaps due to a job change or personal circumstances, they’re more likely to price their homes competitively to sell quickly.
If they have time, are aren’t overly motivated, they may set a higher list price to see if someone takes the bait. In other words, they have the time to not price competitively.
In the world of renting, we do not have the luxury to hold out.
Why? Because vacancies can be incredibly costly.
When a property sits empty, investors incur losses not only in terms of the missing rent but also in property maintenance, utility costs, and the potential risk of vandalism.
More often than not, holding out for more than a couple weeks turns into money out of your pocket, no matter how high you are trying to get the rental rate.
Insight 3: Tenant Quality vs. Rental Price
One of the crucial factors to consider in the rental market is tenant quality. An investor might be tempted to hold out for higher rent rates, but this could attract less qualified tenants. It’s a fine balance to strike.
When properties are priced too high, they often attract renters with lower credit scores and less stable rental histories. These tenants may accept higher rents because their options are limited, but they might also bring problems like late payments and other issues during their tenancy.
Highly qualified tenants have options. They have no motivation to pay more for a house when they’ll be approved for any home they interested in renting. So, they’ll pass on that over-priced home in favor of a home priced within market range.
Seasonality should also be looked at – you can typically get more bang for your buck by leasing during busier months such as spring and early summer.
Insight 4: Renewal Pricing
When leases are up for renewal, it’s essential to hit the right balance between maximizing rental income and retaining tenants.
In some cases, investors may have unrealistic expectations when it comes to renewal pricing. They might want significant rent increases,
For example, if a property’s rent is far below market value, demanding a massive increase might cause tenants to leave. This creates unnecessary vacancy costs, damages the resident experience, and might even lead to more frequent tenant turnover in the long run.
Our process for renewal pricing involves conducting a Comparative Market Analysis (CMA) about 90 days before the lease expires. This analysis takes into account the property’s current rental rate, recent market trends, and any necessary adjustments. However, it’s important not to shock tenants with substantial increases.
Typically, rental rate increases should not exceed 10%, ensuring that both investors and tenants benefit from the renewal.
In the rental real estate market, pricing is a delicate balancing act. While investors seek to maximize their income, it’s crucial to consider tenant quality, fair market values, and the potential pitfalls of overly ambitious rental increases.
By adopting a balanced approach to pricing, investors can enjoy consistent rental income, minimize vacancies, and create a positive tenant experience that fosters long-term stability in their investment.