The Land of the Blind: Are Blogs Misguiding Landlords on How to Set Rent Rates?

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There's a lot of blogs out there for landlords. Most of them are side projects of businesses selling products to landlords, such as apartment listings, investment services or property management. (This blog is no different, although our target market is tenants rather than landlords.) Given the marked absence of actual landlord training programs, these blogs have come to serve as the main DIY course syllabus for landlords working in the 21st century US housing market. While the content varies from blog to blog, they all have something to say about the big topics.

This week I visited 14 landlord advice blogs to see what they had to say about the biggest topic of all: the factors that landlords should consider when setting rent rates.

I've grouped the results by popularity and, of course, I will provide my own take on the matter.

My Own Mini-guide

Personally I think that the following factors should be considered when setting rent rates, in order of priority:

  • Affordability. Based on the reported incomes near the building, what can tenants afford?
  • Local laws. Are there limits on what you can charge for rent?
  • HUD fair market rent rates (FMR). These rates determine what Section 8 voucher holders will be able to rent.
  • Monthly expenses. Mortgage premiums and interest, property taxes, homeowner/condo association assessments, repairs and capital improvement projects. Also known as PITI/AR.
  • Reasonable profit for time invested. The amount will vary depending on the business model.

Note that I do not mention comparable prices ("comps") in the neighborhood. In my opinion, the industry's reliance on comps is one of the main reasons that we're facing affordability problems in rental housing across the country. Landlords have been basing their rent rates on the prices offered by the guys next door for decades now. The explosion of online listing sites has only compounded the problem. These sites only want you looking at the listings they offer, and given that this is how they make their money the bias is totally understandable. But I'm going to go out on a limb here and state that I think that the entire market needs to reset based on actual income levels of renters.

Now, some of you will argue that for this to happen we'd need access to micro-geographic income reporting data including data from demographic groups that traditionally go undercounted, such as immigrants, students and much of the hispanic population. Yes, that would be ideal. But landlords who use comps don't really have access to micro-geographic data other than HUD FMR and the military equivalent, the Basic Allowance for Housing (BAH). Landlords have been using local apartment listings near their properties for ages. They take a snapshot of their local market and set their prices to match.

So what if those landlords took about half of the time they spend pulling comps, and redirected it to looking at job listings in the area for the typical occupations of renters? What if they first took a snapshot of what people are earning, and only then looked at the comps to see if they're reasonable? What would that do to the market?

But I digress. Let's look at what all these articles have to say.

The Articles

Here are the articles I used, in alphabetical order by author's last name where available. Blogs that don't credit their authors are at the bottom of the heap where they belong.

Some of these sites also sell apartment price comparison services and therefore their recommendations should be considered as somewhat biased. These sites are Zillow, Zumper, Cozy, Rentometer, Avail and Domu.

Methods by Popularity

1. Comps.

All 14 articles recommended that landlords use comparison shopping. Most of them recommended looking at amenities as well as size and price when considering comparable listings nearby. Collins gets a shout out as the only one to suggest that financial incentives like free rent and discounts should also be taken into account. Toebe also gets props for providing cost per square footage as a viable substitute when no comps are available in the immediate area.

However, the authors disagree wildly on which sources to use for seeking out comps.

  • Seven recommend Craigslist.
  • A different group of seven recommend Zillow (including, of course, Zillow themselves).
  • Five out of the six blogs with conflicts of interest recommended using their own services for comps. Rentometer, interestingly enough, skipped the opportunity to plug their own product.
  • Five articles suggest driving around for signs or talking to local landlords.
  • Four articles recommend Trulia or local real estate agents.
  • Three each suggest checking with local newspapers or Rentometer.
  • Two articles recommend local property managers, local landlord associations, or Hotpads.
  • One article each recommended checking the local MLS, a home appraiser, the now defuct website Zilpy, AirBNB listings, Padmapper, Rentbits, City-data, Biggerpockets, or just checking "online ads" with no specific websites listed.

2. Expenses.

Nine articles recommended that landlords consider their monthly expenses when setting a price. Lacourse recommends that landlords totally ignore monthly expenses as a factor. Most of the articles that mention expenses as a factor list out the entirety of PITI/AR as factors in monthly operating costs. However, Nicely only mentions repair costs, ignoring mortgage, taxes and assessments. The remaining four articles are mute on the subject of expenses.

3. Consumer Response.

Five articles explain pricing an apartment as the dynamic and responsive process it needs to be. They tell their readers to look at the traffic in response to their ads and adjust their prices accordingly. Too many callers means that the price is too low and the caliber of tenants is likely to be poor. Too few callers means the price is too high.

4. Local laws, Seasonal fluctuations, Market surveys.

We've got a three way tie for fourth place, with four articles each recommending these three factors.

Local laws, particularly rent control laws, definitely have an effect but have only been major limitations in a few areas of the country until quite recently. Dixon, Nicely, Toebe and the folks at Oh My Apartment all mention looking at the laws. Interestingly, 3 out of these 4 articles were published or updated within the last 8 months. The Oh My Apartment article however is 12 years old but focuses heavily on New York landlords so it makes sense that they also mention rent control.

Seasonal demand is a big thing in some parts of the country, mostly in the northern cities. My guess is that all four of the authors who mentioned seasonal fluctuations in market demand for apartments live in these areas and have personal experience with seasonal slowdowns.

It is no surprise that three of the articles recommending use of market surveys to track changes in local housing trends were found on the blogs of companies that also publish and sell market surveys. Cozy, Zillow and Rentometer all advocated for use of surveys. However, Toebe at Wikihow also recommended them and she's about as neutral as they get. Personally I think that while market surveys are great if your properties are actually within the market norms and larger housing markets, they're useless for the more unique properties and areas of the country with smaller renting populations. A survey of 10 people provides very little information of value from a statistics perspective.

5. Affordability, Location, HUD FMRs.

Another tie for fifth place, with three articles each mentioning three separate methods.

My own favorite factor, affordability, was given a nod by Collins, Nicely and Domu. However, only Nicely led off with affordability as the prime factor and even he only mentions "fitting the budgets of renters" rather than my more extreme preference to discard comps altogether in favor of income data. He does work for Zillow though so I guess he had to ride out on the comps horse along with everyone else. The other two articles mention affordability more in passing as a way to warn landlords away from using any single factor: "If you rely too heavily on one formula, your apartment will stay vacant for a long time because nobody can afford it."

Three authors also call out micro-location as separate from other amenities to consider when looking at comps. This makes sense if you're going to consider comps at all, since no two properties are entirely identical even if built by the same contractors off of the same plans. One might be closer to the bus stop, or have better street parking, or be closer to the grocery store.

Three also mention the annual fair market rent rates set by HUD for use by local housing authorities when determining if apartments are eligible for Section 8 voucher holders. These rates do tend to be on the low end for cities but they serve as a good benchmark for what low income renters would consider to be "affordable" regardless of their participation in subsidized housing programs.

6. Property value (1% rule), Profit.

Both of these factors got endorsements in two articles each, although property value also got condemned as a worthwhile consideration in two articles.

The 1% rule instructs landlords to set their rent rates at 1% of the appraised value of their property. Dixon and Toebe recommended it with caveats based on the economic class of the property's location, although they give ranges of 0.8 to 1.1% and 1.1 to 1.3% respectively. However, Collatz and Collins expressly state that the 1% rule is useless, if not potentially harmful.

I think most renters will be surprised to see profit so low down on the list. Perhaps it will offset seeing affordability so far down as well. Collins and Eberlin have profit on their minds and specifically state that a landlord should go into the pricing process (and the business of landlording entirely) with the goal of making a monthly profit off of their investment. They each provided a formula based on monthly expenses as starting benchmarks for setting rent rates, although the formulas were quite different. Collins suggests adding 30-40% to monthly costs. Eberlin recommends a more modest 0-6%.

7. Military housing allowances, Days to Vacant.

These two were only mentioned once each.

The Military basic allowances for housing, recommended only by Biggerpockets, are interesting and a factor that I actually hadn't considered before. They are set based on a survey of rent rates although they are only available in areas of the country with large military presences. As another government-sourced data warehouse based on empirical data, BAH rates could be compared against HUD FMRs. HUD bases its prices at the 40th percentile of actual market rates so that they can serve as many low income residents as possible. The military in contrast excludes high crime neighborhoods and pulls comps only from areas where civilian income is on par with the income of enlisted service members. Neither option is perfect but they're both worthwhile sources of data when viewed as a pair, provided that your area has BAH pricing available.

Looking at the difference between the FMRs and the BAHs for Chicago, the military rates all appear to be a few hundred dollars higher for service members without dependents, and substantially higher for those with families. The BAH rates also seem way out of reach for the average renter in Chicago. To me, the HUD rates seem far more reasonable.

Ryan Coon at Avail is the only one to mention that a landlord should set their list price as high as they can when they have a long time before the apartment is vacant, and then lower the price over time until the current tenants move out. I think this is certainly a valid strategy for suburban and rural areas. For cities though, I do not recommend showing occupied units at all. The risk of violence and theft is far too high, and the overall impression that prospective renters get from viewing occupied units is often negative.

Do you agree with me that too much value is placed on comps in a market where affordability is a big issue? Do you agree that we need an independent educational effort to ensure that landlords are being trained in humane property management as well as long term investing? Do you think that greater or lesser emphasis should be placed on other factors listed in this article other than comps and expenses? Are there other factors you would consider when setting the rent rate of an apartment? Let me know in the comments, or at the RentConfident profiles on Facebook or Twitter!

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Published by

Kay Cleaves