From cap rates to cash-on-cash return, there are a number of tools Landlords and real estate Investors use to determine whether or not a potential investment is a good one.
At the base of just about every one of them is the property’s rental cash flow.
For this reason, Landlords and the Property Managers that work for them often pursue the highest rental price they can get.
And this makes sense, but unfortunately, that pursuit often leads them to a common if seemingly logical mistake: overpricing their rental property.
Unless you’re in an ultra-competitive part of Indianapolis and you’ve pretty severely under-priced your property, it’s highly unlikely the rental amount your Tenants agree to will ever increase while negotiating the lease.
If anything, it might go down.
So naturally, your inclination will be to start your listing price as high as possible, but surprisingly, this can have the opposite of its intended effect. Rather than maximizing cash flow, overpricing your rental unit can result in less income for you.
Here are three reasons why overpricing your Indianapolis rental property is a horrible idea:
- A High Asking Price Can Increase Time on the Market
Let’s say, for example, your two-bedroom bungalow in Broad Ripple is listed at $1,200. That’s at the top end of your potential Renter’s price range, so they click that they're interested to see what all the fuss is about. It’s a nice place, but they end up going with the very similar unit listed at $1,000 down the street.
This will happen a lot, and if you’re not aware of it, you might not realize price was the primary reason for their decision.
These days, when you place a listing up on a platform like Zillow, you’ll almost immediately get hits. This can often falsely validate Landlords who have set an unreasonable rental price.
It’s simply too easy for a prospective Tenant to click a button and schedule a tour of a property. And as a result, if you start too high, you’re more likely than ever to stay too high for too long.
Staying on the market too long is bad. You’ll waste your time with more showings and, most importantly, you’ll often increase vacancy days and therefore increase the cost of tenant turnover.
It’s almost always better to rent your property faster. Just think, one month of vacancy for a $1,200 unit brings you to the same exact cash flow on that unit as if you had originally priced it at $1,100.
2. Those that have Seen the Unit Will Ignore Price Changes
People make irrational financial decisions – there’s an entire rapidly growing field of study devoted to this claim.
This can be to your benefit, like when a Tenant is more willing to rent your property because you came across as warm and friendly during the walk-through. But it can also have a negative impact if you’ve overpriced your rental.
Let’s take that $1,200 unit for example again. Even if those Renters haven’t signed a lease on the $1,000 unit they found, they’re highly unlikely to consider your unit again. They’ve crossed it off in their mind and, regardless of any price changes you make to match the more appropriate going rate, they almost certainly will not notice.
Your potential pool of Renters will diminish faster than it otherwise would.
This can have a compounding effect. Less potential Renters means you’ll feel the pain of an overpriced rental even more, and you may actually end up lowering your asking price more than you otherwise would have.
To attract a renter from your smaller pool may require you to drop all the way down to $900 instead of the $1,000 you could have had.
3. Many Potential Renters Will Never See Your Listing
Speaking of a shrinking pool of Renters, setting a price that’s too high will have an immediate impact on those that see your listing.
On listing platforms like Zillow and Realtor, etc. searchers can easily set a price range for themselves. If you’re not in that price range, they won’t see your property – it’s that simple.
If you’re in a Renter’s market in which there is more quality inventory than potential Renters, this is doubly painful.
Every day you can have your listing viewed is critical as vacancy is a cash flow killer.
So How Should You Price Your Rental?
Around Indy, you can typically expect monthly cash flow per door of about $100-200 dollars. That’s not an exact number, so be careful, but it is a nice starting point when pricing your unit.
Take a look at the listing platforms your potential Renters will use. Keep in mind that some of these listings are overpriced, but its useful to know what your Renters will be seeing and which price ranges are most common.
Similarly, understand the comps in your neighborhood. Is your property Class A, B, C, etc? What types of amenities are Renter’s looking for and do you offer them?
As long as you think through and consider all of this information (and resist the temptation to always go higher!), you should be in good shape.
If you employ a Property Management company, this is a very important aspect that they should be able to guide and advise you on.
Remember, it may seem strange, but overpricing your rental unit – particularly in a steady, reliable but not explosive market like Indianapolis – can be a big mistake.
It can ultimately result in less cash in your pocket, even if you’re able to eventually achieve the high price you were targeting.
Price your rental listing appropriately to maximize cash-flow (and minimize stress!).