Market Cycles and the Law of Supply and Demand for Rentals
So, I bet I know what you’re thinking, “What? Lower rents, you say? But, I want to RAISE rents, not lower them!” Of course you do. Don’t we all?
As rental owners, don’t we all wish that we lived in a world of never-ending rent increases? While we’re at it, let’s throw in completely reliable tenants, appliances that never break, properties that never go vacant — and unicorns, and cupcakes (I like cupcakes) — you get the idea.
The reality is that prices for every product—and rental units are most certainly a product—rise and fall cyclically over time. Sometimes prices are rising, and sometimes they are falling, which is based on the supply of available units for rent and the demand for those units by prospective tenants.
In times when there are lots of new construction units coming available, rental prices tend to fall. Also, when area demand for rentals drops, for whatever reason, prices tend to fall. On the flip-side, during times when the number of available rental units is small as compared to the number of tenants looking to rent, rental prices tend to rise. Make sense?
Trust me, I have been active in real estate markets for thirty years, and I have seen values and rents go up, then down, then up, then down again—such is the way of the world. To try and fight reality hurts nobody but yourself—and your wallet.
Knowing Your Market—the Key to Getting Rent Rates Right
If you are going to set rent rates properly, then you have to become keenly aware of what is going on around you. You have to be mindful of such things as the rate of new construction, the average wages in your area, the demand for housing and jobs. Talk to other landlords and professional property managers to understand what they are experiencing.
You cannot pick a rental rate simply because that’s what you got before—what you got in the past has nothing to do with your present. We are concerned with maximizing what you are going to get now! Price too high and you will sit on the market and lose money due to prolonged vacancy periods. Price too low and you are giving away money needlessly. You are looking for the Goldilocks-zone of pricing—not too high, and not too low. Make sense?
How to Know When It’s Time to Lower Your Asking Rent
Consider these three things when deciding if it’s time to lower your asking rent:
- Is anybody calling to inquire about the property?
- Are you getting inquiries, but few showing appointments?
- Are you getting showing appointments, but no applications?
Let’s go through the previous three questions in light of this fictitious rental ad:
“Gorgeous, 1,600/sq. ft, 3-bedroom 2-bath w/garage, pool. Home close to downtown, Smithfield neighborhood, Lawn-care and pool-care included $1,700/m. Call: 941-XXX-XXXX.”
Is Anybody Calling to Inquire About the Property?
If nobody is calling, there are two possibilities: either nobody is reading your ad, or they are reading it and not interested. The first possibility—nobody reading the advertisement—rarely happens when a professional property manager is handling the property because of their ability to distribute the property over a vast advertising network. However, it is symptomatic for individual landlords looking to skimp and save a few bucks on advertising. You must spend money on proper advertising!
Assuming that word is getting out about the property, but still no inquiries, then they are likely seeing the price and deciding that $1,700/m is too high for such a property in the “Smithfield” neighborhood.
Are You Getting Inquiries, but Few Showing Appointments?
Same as above: people are inquiring, probably even driving by the property, but deciding that the price is too high for the property in that neighborhood.
Are You Getting Showing Appointments, but No Applications?
Showings without a follow-up are a sure-fire sign that your property is too high for current market conditions—people are showing up, seeing it, and still not applying. They simply do not like what they are seeing—for the price.
The Solution
The solution is simple: price the property appropriately. A professional property manager will likely price the property correctly from the start, thus avoiding the lost time and money that goes along with poor pricing. If you find yourself with a property that is sitting on the market for a prolonged period, then you have to start incrementally lowering the price until the market starts responding favorably to your offering—the phone starts ringing, the showings start picking up, and the applications start coming in.
When it comes to rentals, time is money—every day that goes by vacant means money that could have gone into your pocket is lost forever.
About the Author
My name is John Michailidis, and I’m the broker/owner of Real Property Management of Sarasota & Manatee, a full-service residential property management and leasing company dedicated to helping landlords properly price, advertise and lease their properties. I can also help you screen tenants, collect rents, and handle maintenance calls 24/7/365 days a year.
I’ve been in the real estate game a long time—first licensed in 1990—and I am also a licensed attorney (non-practicing at this time—I dedicate myself exclusively to running my property management company) so I’ve been around the block a time or two. I have a deep understanding of the needs of landlords like yourself (I personally own rentals, so I “get it”). If you own residential investment real estate anywhere in Manatee and/or Sarasota counties, from Parrish – Ellenton – Palmetto in the north, to Venice – North Port – Englewood in the south, feel free to reach out to my team at 941-216-0005, or through our website HERE.
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