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Fatwallet Landlords: Do you set your rent below market value, at market value, or above market value?

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Hi, just curious to find out from the landlords here how you set your rent on your investment properties.  We currently rent out 4 condos, all pretty nice condition in good neighborhoods.  We set rent at around $50-$100 below market value.  We are picky in who we rent to, so by having it below market value, we get a lot of applicants to choose from.  We recently rented out a condo.  We had around 15 applicants look at the place and 14 wanted to rent the condo.  We ended up choosing this pleasant looking young couple.  We're leaving money on the table, but it's worked out pretty well so far.  

We've fortunately had no evictions since we started renting out our first place in 2005.  The closest we've come is a 2 bedroom condo we rent out that usually has 2 friends moving in.  Sometimes one roommate moves out of the state, the other roommate finds another roommate, usually through craigslist.  We didn't run credit/background checks on the new roommate. It worked out well for the first few times, cycling through different roommates.  But then one of the roommates moved out of state, and the other roommate found a co-worker to live there.  This new roommate sent a check for security deposit and first month.  The security deposit went through but the first month's rent check bounced.  She kept giving us excuses about not paying.  We were worried about having to evict her and looked into our options.  The other roommate was stressed out too about her not paying because we would have to evict her too, even though she was paying.  We finally had to do an intervention where my wife and I met with her and we and the other roommate basically gave her an ultimatum to move out at the end of the month.  Fortunately, she did move out by the end of the month and we didn't have to initiate an eviction.  We lost about half of 2 month's rent, but feel lucky because it could have been much worse.  We've learned our lesson and will run credit/background checks on everyone that will be moving in, no matter what.   

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Most FWF landlords have their rent rates set by section 8 vouchers.

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Quikboy4 said:   Most FWF landlords have their rent rates set by section 8 vouchers.
For those who do, keep in mind that assisted housing often pays more than market rates. In this area, it's typically about 20% more on low-end condos and townhouses and can be checked here. 

Here's an example for Fairfax County, VA:
Hypothetical FY 2017 & Final FY 2017 FMRs By Unit Bedrooms
Year Efficiency  One-Bedroom  Two-Bedroom Three-Bedroom  Four-Bedroom 
Hypothetical FY 2017 FMR $1,440 $1,513 $1,746 $2,300 $2,855
Final FY 2017 FMR  $1,440 $1,513 $1,746 $2,300 $2,855

This is a 50th Percentile Hypothetical FY 2017 FMR area as established by HUD regulations, and the rents shown here at the 50th percentile. 

For market-rate rentals, one might consider every other week rent collection. This allows for 26 payments per year. If you disclose carefully and accurately, and write your lease accordingly, this allows for 13 months of rent in a 12-month period.

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I try to be the lowest price in immediate area with properties I consider to be my direct competition; based on #bdrooms, Sq Footage, Community Amenities. Mine are single family and not in high concentration areas (I.E. No HighRise, Apts, Condos), where as yours may be surrounded by many Condo/Apt buildings.
I adjust price as the market changes while I incur a vacancy. If existing competitor listings are higher rent than I have recently charged I position myself so that I am charging more but still lowest on market. If a new property becomes available at lower price I will adjust accordingly. I'm talking $0-$25 under market, not $50-$100. Rents have been increasing so much these last few years I am happy when a tenant decides to leave and isn't a long term tenant. You need to ask yourself the same question. If you are starting out $100 under market, are you $175 a month under market by the 2nd or 3rd yr? That's too much of a bargain.

BTW...your terminology about a pleasant looking young couple is a red flag for me, but Ill assume that since they are not the subject of your question for brevities sake you...

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We try to aim for market rates when filling a vacancy, then lag behind rent increases on renewal for a good tenant. Our area has had steady and significant rent increases for the whole time we've been landlords and might need some adjusting in another environment. That's probably also part of being able to remain choosy when finding a new tenant at market rates. I don't think we get a ton of applicants, but I think have only had a vacancy stretch to a max of about a month.

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JaxFL said:   I try to be the lowest price in immediate area with properties I consider to be my direct competition; based on #bdrooms, Sq Footage, Community Amenities. Mine are single family and not in high concentration areas (I.E. No HighRise, Apts, Condos), where as yours may be surrounded by many Condo/Apt buildings.
I adjust price as the market changes while I incur a vacancy. If existing competitor listings are higher rent than I have recently charged I position myself so that I am charging more but still lowest on market. If a new property becomes available at lower price I will adjust accordingly. I'm talking $0-$25 under market, not $50-$100. Rents have been increasing so much these last few years I am happy when a tenant decides to leave and isn't a long term tenant. You need to ask yourself the same question. If you are starting out $100 under market, are you $175 a month under market by the 2nd or 3rd yr? That's too much of a bargain.

BTW...your terminology about a pleasant looking young couple is a red flag for me, but Ill assume that since they are not the subject of your question for brevities sake you...

  
Yeah, in one of our condos in downtown Chicago, one roommate bought her own place.  The other roommate couldn't afford the place on her own, so we gave her a little bit of time to find another roommate while we showed the condo to prospective new tenants.  I didn't mind if she couldn't find anyone as we would have received more rent for new tenants, but she found someone at church.  The new batch of tenants that we showed the apartment to didn't seem as good as our current roommate, so it worked out.  

We raise our rents accordingly so we're always always within $50-$100 of market rent.  Yeah, I'm considering being more between $25-$50 below market instead, I think we'll still probably get a good pool of tenants to choose from.  We're just very paranoid about new renters trashing the place or not paying and needing to evict.  I don't ever want to go through that process. 

Oh, we don't just go by how tenants look, that's just part of what we consider.  She has around 770 credit score and he has around 820 credit score, no delinquencies or citations for either of them, don't look like the party animal type. 

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You can always have the initial lease for below market, then raise rent at renewal to at market or even slightly above market. There is a not-insignificant cost to the tenant to move once they in your place. you can always rescind the rent increase if they threaten to move ...

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I try to stay about $50 below the immediate market area to retain the best tenants...the way I see it is that if a tenant moves after 2 years then I have to re-paint the apartment and freshen it up for the next tenant at a cost of around $1k plus lose one month's rent and then not sure what kind of tenant I'll be stuck with.  Most my tenants stay more than five years.  I have one tenant (a single guy) in the same apartment for 24 years.  Sends me rent via Chase QuickPay each month and may be lucky to see him couple of times a year if at all.  When something breaks, he allows me to go fix it at my convenience, even when he's not home.  A LL's dream tenant.

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rufflesinc said:   You can always have the initial lease for below market, then raise rent at renewal to at market or even slightly above market. There is a not-insignificant cost to the tenant to move once they in your place. you can always rescind the rent increase if they threaten to move ...

Some of us have rent control so you have to price it high initially. We can't just willy nilly pick whatever increase we want. Otherwise people here would be paying $5000 a month for a 1br.

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Slum lords

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calca said:   
rufflesinc said:   You can always have the initial lease for below market, then raise rent at renewal to at market or even slightly above market. There is a not-insignificant cost to the tenant to move once they in your place. you can always rescind the rent increase if they threaten to move ...

Some of us have rent control so you have to price it high initially. We can't just willy nilly pick whatever increase we want. Otherwise people here would be paying $5000 a month for a 1br.

if you're getting $5k for a 1br, then you shouldn't have trouble pricing at at market and get good tenants?  

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I actually avoid "pleasant looking young couples" - they tend to leave after a year and buy houses....and I hate turnover.

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solarUS said:   I actually avoid "pleasant looking young couples" - they tend to leave after a year and buy houses....and I hate turnover.

One or two year turnover is great. Market rate rent jumps 10% a year and rent control limits you to 2%.

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turn39 said:   solarUS said:   I actually avoid "pleasant looking young couples" - they tend to leave after a year and buy houses....and I hate turnover.One or two year turnover is great. Market rate rent jumps 10% a year and rent control limits you to 2%.Only great if the property is subject to rent control. My guess is most landlords here are not. Personally I'd never consider investing in rent control area.

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Above.  Because you know... buy low, rent high.

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scripta said:   turn39 said:   solarUS said:   I actually avoid "pleasant looking young couples" - they tend to leave after a year and buy houses....and I hate turnover.One or two year turnover is great. Market rate rent jumps 10% a year and rent control limits you to 2%.Only great if the property is subject to rent control. My guess is most landlords here are not. Personally I'd never consider investing in rent control area.

Arent you in CA? Rents are so out of control here, eventually all the desirable parts of the state will be rent controlled. Better get ready to sell then.

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Slightly below. We live there too, and we want to keep tenants (friends) in there that we like and can tolerate. The alternative would probably be airbnb or just leaving it empty.

When we didn't live there, we priced at market, except for one tenant who got a reduction for doing maintenance.

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llca said:   scripta said:   turn39 said:   solarUS said:   I actually avoid "pleasant looking young couples" - they tend to leave after a year and buy houses....and I hate turnover.One or two year turnover is great. Market rate rent jumps 10% a year and rent control limits you to 2%.Only great if the property is subject to rent control. My guess is most landlords here are not. Personally I'd never consider investing in rent control area.Arent you in CA? Rents are so out of control here, eventually all the desirable parts of the state will be rent controlled. Better get ready to sell then.I am. I don't agree with your prediction though. Either way, the property values in all the desirable parts are also out of control, and out of sync with the rents they bring in. My rental is in a more remote area with better numbers (higher yields).

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scripta said:   Personally I'd never consider investing in rent control area.
+1

plus places with rent control are often tenant-friendly and high-tax.

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