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Understanding Rental Property Pricing in a Seller’s Market

Understanding Rental Property Pricing in a Seller's Market

Housing prices continue to soar in many areas as supply still struggles to keep up with demand. This increased demand and low supply creates a strong seller’s market within the real estate industry – but where does this leave rentals? The truth is, the rental market does take some cues from the housing market. Therefore, landlords must understand this relationship’s impact on rental property pricing. So, join us below as we discuss how to determine the right rental rate for your unit and why a seller’s market may make more of a difference than you realize.

What is a Sellers vs. Buyers’ Market?

As mentioned above, a seller’s market is created when demand is up, and supply is down. During 2020, interest rates fell, allowing many homebuyers to take advantage and pursue their dream of homeownership. However, with few houses on the market and slowed new construction, prices saw a huge jump as buyers clambered to beat the competition.  Thus, creating a market where buyers can likely choose from multiple offers and perhaps sell well above the asking price.

On the flip side, a buyer’s market means plenty of available options for buyers to choose from. Therefore, sellers must adjust prices to attract buyers and sell quickly.

How the Housing Market Affects Rental Property Pricing

Even as life returns to normal throughout much of the country, the COVID pandemic effects are felt in the housing industry. That said, the demand for homes continues to outpace supply. This means that many individuals who would have purchased are now seeking rentals as they wait for the market to shift.

How the Housing Market Affects Rental Property Pricing

Another factor driving rental price trends is location. The economic freeze of 2020 led to a huge shift in interest from major cities to the suburbs. As a result, even as home values steadily increased, rental rates in the major metropolitan areas fell. But according to the latest data, the waves of rental prices are shifting.

According to Zumper’s National Rent Report, rental rates are on the rise. Overall, prices for a one-bedroom climbed almost 5% year over year. To put that into perspective, 2020 saw a rent growth rate of around 1%, even as the housing market took off at a record pace.

For the most part, the huge increases are driven by some of the most expensive cities in the country bouncing back and making up for the falling rates we saw throughout the pandemic. As cities across the US continue to reopen, likely, rents will only continue to go up. Factors that caused owners to drop prices to limit vacancy during the pandemic are now fading. Some experts suggest that for the remainder of 2021 and into 2022, renters may be surprised by just how much rates could rise.

Even with rising rents, the current seller’s market, and many still dealing with the loss of employment or income interruptions, renting continues to be an attractive option for many.

How to Calculate Rental Property Pricing

Calculating rental rates is a significant step in maintaining a successful rental property business. That said, there are various factors to consider when determining what to charge future tenants. Continue reading below as we review these different variables.

How to Calculate Rental Property PricingWhat is Fair Market Rent?

Each year the US Department of Housing and Urban Development establishes a list of “fair market rents.” These figures are calculated based on the property location, unit type, and overall size or bedroom count. While these rates do not account for individual amenities or local demand, they offer a good starting point when researching potential rates. Check out the HUD Fair Market Rent search tool to see what rates look like in your area.

Check Out the Competition

The local competition is an essential piece of the puzzle when it comes to rental rates. Therefore, when evaluating local comps, it is necessary to look at what is currently on the market as well as recently rented properties. That said, one of the most convenient tools landlords have is Zillow’s Rest Zestimate and Rent Calculator.

Zillow considers the home’s size, amenities, and local comparable properties to generate a fair estimate. While the formula is not always perfect, this is a helpful tool.

Consider the Amenities

The property’s finishes and amenities are additional variables that affect rental prices. In addition, these amenities help differentiate your property from others in the neighborhood. Some of these features may include, but are not limited to the following –

  • Number of Bedrooms
  • Extra Bathrooms
  • Office Space or Bonus Room
  • Attached Garage or Available Parking
  • Pets Welcome
  • Onsite Laundry or In-unit Washer/Dryer
  • Updated or Luxury Finishes
  • New Appliances
  • Energy Efficient
  • Proximity to Shopping, Entertainment, or Restaurants
  • Rooftop Deck or Other Outdoor Space

Follow the 1% Rule

The 1% rule is common among investors when evaluating the viability of a potential rental investment. Simply put, the rental rate should be equal to, or ideally greater than, one percent of the purchase price. So, for example, if a property costs $150,000, then the rent needs to be at least $1,500 per month. But, again, this is just a tool to consider along with other variables to arrive at the best market rent for your unit.

The Stress-Free Way to Market Your Property

Worried about rental property pricing or filling a vacancy quickly? After all, setting the right rent from the start is essential. Bay Property Management Group understands the local market and regional trends that impact rental rates. In addition, our team of experts uses effective techniques to market your property across all relevant platforms for maximum exposure. So, if you are looking to bounce back after the pandemic uncertainty or need help maximizing a newly acquired investment property, give us a call today. At Bay Property Management Group, our staff of experienced local property managers and industry professionals will help guide you to a rewarding investment experience.