The biggest mistake is probably surprising, but I see it all the time. It’s under renting your property.
What do I mean by under renting?
Under renting is where you are asking way less in rent than the typical market rate. For example, I have some friends who I just recently found out that they have a rental house. The house is in the most desirable school district in our area. It is a three bedroom two bathroom house with a large garage and a fenced in yard. They have been renting it out for $350 a month. Yes, that’s right, $350 a month. I hope that makes you cringe. It should, because I wouldn’t rent that house for less than $1000!
Why do people under rent?
I think that people under rent their property for a couple of reasons. First, they don’t treat it like a business. They don’t take it seriously, and don’t realize the enormous opportunity for building wealth with minimal work that is property investment. Second, they think that by offering their place for rent way under what others are charging that they are going to beat the competition. They think that people will see their property listed next to someone else’s for hundreds of dollars less and will naturally chose the lower amount.
Why is it so bad?
Here’s the truth: I’ve never see it turn out well. Remember my friends that were renting out their house for $350? Well, they have had bad renters back to back. Their place has been sitting empty for the past two months because they need to repair the damage from the last renters and they have been wanting to quit. They just wanted to sell their place and cut their losses (sound familiar to anyone?). Luckily, I found out about the situation and we will be helping them get their place fixed up and rented to good people.
The psychology of renters
Let’s say that you need a new pair of dress shoes. You would have a ton of options to choose from to purchase your shoes. You can go to a high end shoe store, like a Nordstrom’s. You know that you will pay more than other places, but that you will get a high quality item. You can also go to Payless. At Payless, you are guaranteed a cheap price, but you also know that the shoes will be cheaply made and very low quality.
The same can apply to rental property. When a good person sees a property listed for significantly less than the other places on the market, they tend to think it’s a negative. They will probably assume that the place is a dump and not even bother calling on it. Think of the adage, you get what you pay for. The same typically applies here.
How it can lead to more problems
So if good quality renters are not going to be interested in your property because of the price, who will be calling? The bad renters! Typically in these scenarios, bad renters will be the ones that are interested in your place. They couldn’t usually afford a property as nice as yours, but at your cheap price they can. It’s seen as a pair of Payless shoes, and not the Nordstrom’s.
It comes down to respect and worth. By putting such a cheap price on a place that is worth much more, you are telling renters that you do not value your property much, and neither should they. You are sending a subconscious message that they can mistreat your property, because you do not care much about it anyway. Does that make sense? I hope it does.
How do you properly estimate your rental rate?
So, I hope by now we’ve established why you shouldn’t rent your property for a very low amount, but how do you know what the correct amount is? Do some market research! Check your local classified ads in the newspaper and see what people are renting their properties for. If you see that three bedroom houses in your neighborhood are renting for $600 then charge $600, if they are renting for $1,000, then charge $1,000. Not only will you be making more money in rent each month, you will typically avoid problems like evictions and having your property damaged. Happy renting!