You will have to come up with many thoughts when you start considering to acquire a multifamily property. The first, and likely the most important question which comes across in your mind is, what will the rent be?
This conversation can take a long time to cover all aspects, but I tried here in this article to cover more and more. The conversation about rent can give you a headache. But if you read this article you will get to know all the answers and can get rid of this headache. I try to shed light on all the question, you will have in your mind. Here are absolute rules for setting appropriate rent prices.
- Rent should cover all your expenses
Every landlord thinks rent should be high enough to cover all his expenses. Rent is the fixed income you will earn every month. So, it should be enough to afford all your expenses and something should be left over as cash flow.
Well, I do not like any hard and fast rule, but the purpose of this conversation is, what should be a minimum rent requirement. For instance, a 50% expense ratio, which covers both the economic losses and the operating expense. So, in the case of a $600 rental, a 50% expense ratio would leave us with $300 to cover 3 very important characteristics which are:
- Debt service
- Capital reserve
- Cash flow
If you think practically, the $300 is simply not enough to cover all three above things. And since debt service is a prime factor, the choice we face is between our profit and Capital reserve. What we usually see is in the landlord’s pocket, the money left over after debt service, and then go to do some other work for some cash flow. This goes for years and years, and then their house gets destroyed.They find themselves needing to repair and renovate their houses like to replace the flooring, new painting, the water heater, and a stove. This is a sad experience for them because they have to do all these repairs from their cash flow. So, the situation can get worse for them. So, in order to get rid of this situation, always try to fix the rent that will cover your 80% expense. It is good if you can cover your 100% expense from the rent, but the minimum requirement should be 80%.
- Protect and grow your investment
Every landlord has two main objectives. To protect his investment, and to grow his investment. Protecting your investment is a function of operating at a price point which is attractive to an economically stable tenant base.But,it should not get so high that it limits our audience. In other words, until and unless you are in a very selective boutique market or asset class, you should not want your rent to be in the 90 percentiles. Many people cannot afford that rate.
- Market range
This conversation is specific about the market. I am talking about owning rentals that are within the 55th to 70th percentiles, within the range of, availability in the market place. So, if in your market rents range from $500 to $1,200 for class A, you probably want to be in the $725 to $1050 range. This will be attractive to tenants who are stable enough to protect your investment.Remember, it would not be so high that only high class of the marketplace can take on. Always set both minimum and maximum rent requirements for your tenants.
- Rent of the property should be per square foot
You have to price your apartments on a per-square-foot basis. Do some research online and then make rents for your property as per square foot not as per rooms.