Somewhere between “no one wants my rental unit” and “I got 150 calls within a half hour of listing,” there’s a perfect balance of property improvements, rent pricing, and high return on investment. But how do you find that balance?
That question isn’t as simple as it sounds. Every neighborhood has its own expected amenities, and this gets even more blurry when a neighborhood experiences rapid appreciation or a demographic shift.
And is it even good strategy to simply offer expected amenities?
No stone tablet was handed down from the heavens, but there are still basic rules landlords can follow to maximize returns on their investment.
6 Tips to Craft a Highly Desired Rental — Without Over-Improving It
1. Become a neighborhood expert.
If you don’t know your neighborhood market inside out, upside down and 10 ways from Tuesday, prepare for mediocre returns or worse.
As with any business, you need to know exactly what the competition is offering and at what price. Don’t assume you know exactly how nearby rental units compare to yours — find out. Firsthand.
Look up five or six available rental units as close to yours as possible, both geographically and structurally. Then go walk through them as a prospective tenant. Invoke your inner method actor and actually think like a prospective renter as you walk through. What tugs at your heartstrings? What turns you off? What strikes you as average or boring? Imagine yourself living there, and think through what would make your life better by living there.
After collecting some firsthand impressions, sit down at the old drawing board. What amenities seem like a baseline, simply expected and assumed in the area? What amenities do some units have but others don’t, and how did they affect rent pricing?
That latter is important: You need to know exactly how much more you can reasonably expect to charge if you were to add a given amenity.
2. Decide on a market segment to target.
Before going any further, you need to stop and decide what segment of the local market you want to target. Do you want to minimize all costs and target lower-end tenants in that neighborhood? Go mid-market? Or spend a little more and target the best tenants in the area?
That answer largely depends on the unchangeable aspects of your unit. Is it on the edge of the neighborhood, closer to more marginal areas? Does it have an awkward layout? Is it missing some essential feature that is not practical to add? If so, you may want to target more budget-conscious renters in the area.
Alternatively, if your unit could potentially attract the best renters in the area with a few tweaks and improvements, consider a higher-brow approach.
3. Gauge response rates, pricing, and the purpose of improvements.
What is the point of spending money on your rental unit?
There’s only one answer: to earn a better return in the long-term.
Every improvement you consider, from new flooring to central air conditioning to a new deck, must be justified by higher rents. Period.
Before making any improvement, you need a good answer to the question, “How much more can I charge in rent if I invest in this upgrade?” Then you can determine how long it will take to recover the cost.
Here’s a hint: The best upgrade investments pay for themselves within a single tenancy, let’s say a two-year period. Many property upgrades have diminishing returns, either because the tenant will cause wear and tear or because technology and tastes evolve over time. After all, olive green appliances were once all the rage, but how long did that trend last?
Target a price point, and then advertise at it. You can gauge your accuracy and success by the response rate to your rental listing. How many people contact you with interest? Just be careful to adjust for demand in the area; some neighborhoods are so rough that you may not get many replies no matter what.
4. Use standout amenities as a strategy.
Some amenities are uncommon enough that they grab prospects’ attention and intrigue them. They can compensate for and even outweigh other shortcomings.
For example, I had a home on a busy downtown intersection with no parking. It overlooked a convenience store. I couldn’t change any of those shortcomings, but that didn’t mean I had to go lower-end.
So I installed a hot tub on the deck.
Suddenly, what was a $1,700/month property became a $1,995/month property. It simply demanded prospects’ attention as they read through dozens of other listings in the neighborhood.
In many areas, smart home tech can add some quick cachet to a property, and it costs little to install. Have a dingy, dirty cellar that stays cool year-round? Add a wine rack and advertise a “cellar wine cave.” Or if the backyard is a concrete or dirt patch, grab a few bricks and segment off part of it as a “quaint herb garden.”
I like stained glass transoms — they add charm and can be bought and installed for a few hundred dollars.
Sit down and brainstorm 25-30 ideas for novel amenities that your competition doesn’t offer. The first dozen (or even two dozen) might be ho-hum, but if you keep brainstorming, you’ll eventually work past the standard fare and come up with some original, clever ideas.
5. Remember: It’s better to under-improve than overdo it.
Every adult has cooked something in their life and knows that undercooking is better than overcooking — you can always throw it back in the oven. You can’t un-cook it, though.
The same goes for rental properties. You can’t un-spend that $3,000 on new hardwood floors. But you can always make additional improvements over time.
Let your response rate be your guide. If you get plenty of responses from qualified applicants, congratulations. If the phone is quiet or you get nothing but deadbeats, spend five minutes and $0 by updating your rental listing. Advertise that new upgrade or amenity you’ve been considering. If qualified applicants start calling, you can send a contractor over to make the upgrade.
6. Keep good tenants and gradually raise the stakes.
Good tenants should be kept because turnovers are profit-killers.
So how do you keep good tenants? Aside from being responsive and courteous, be proactive in making occasional upgrades and raising the rent every year.
Wait, what? Won’t raising the rent send my tenants packing?
Not if you raise it incrementally every year. Train your tenants that rents go up every year, like clockwork, but that the rent will never spike an astronomical 20%. They should simply come to expect a 2-6% increase each year.
Touch base with them periodically about what upgrades and amenities they’d add if they could wave a magic wand. Some of their ideas will be too particular — they might love a massive commercial oven for all their Food Network experiments, but that doesn’t mean future tenants will pay more for it.
Your tenants will undoubtedly give you some good ideas, though, that can increase the marketability and expected rent for the next tenancy. Look for sturdy, permanent improvements that will survive this tenant’s occupancy and will help you rent the property for more next time around.
These tenants will be more likely to renew their lease if you make the improvements, and the upgrade will keep paying for itself even after they move out. Keep your good tenants, keep one eye on your property’s longer-term profits and marketability, and you’ll keep more returns on your rental investments.
Have any tales of woe or glory with your rental improvements?
Share them, so we can learn from your experience!