There is no hard and fast scientific formula to determine what market rents should be for an apartment building investment. Instead the apartment building owner should rely on less scientific but equally important factors such as amenities and location. The owners frame of reference needs to switch from owner to renter to truly understand the factors that influence a renters willingness to pay a certain rent.
You Must Determine What Factors Affect Rents in Your Area
Imagine that you are a potential renter looking for an apartment in Ft. Lauderdale, Florida. There are literally hundreds of different factors that you will be considering when you are searching for a place to rent. Location will play a key part in your decision to pick a place to rent. However, an ideal location for one tenant will differ widely from another. For example, maybe you would like to live closer to beach. You will limit your search to those apartment buildings that are near the ocean. On the other hand, you might be more concerned with finding an apartment closer to the major highway, which in this case is I-95. You want to be close to the highway because this is the road that you take to and from work every day. The closer you are to I-95, the shorter your daily commute will be. Therefore, when searching for an apartment building to buy, you should first consider who will be core base of renters. Will they be mostly commuters? Will they be mostly retired people looking for a pleasant location close to the beach? Consider the population demographics of your prospective renters. Are their really enough retired people, looking for an apartment close to the beach to justify the higher cost of real estate closer to the water? One mistake that I see apartment building investors make is buying an apartment building based on their own personal preferences rather then considering the needs of the actual marketplace.
Fort Lauderdale is a perfect example. The costs of apartment buildings closer to the beach are considerably more expensive then apartments further West and closer to the highway. However, the people that prefer to live in apartments closer to the beach are usually seasonal renters who come down to Fort Lauderdale only during the winter season from the North East. Generally, these renters are only looking for a seasonal arrangement that may only last from 3 to 8 months. It is important for the apartment building investor to consider whether they will be able to charge enough rent per unit to justify the continuous turnover that will result from catering to this demographic. On the other hand, the apartment building buyer may be able to find a suitable apartment building further West, closer to the main highway, and attract full time, long term renters. These renters will probably pay less rent every month, however the turnover will be much lower. The costs of tenant turnover can mount very quickly when you figure in the lost rent along with the time and money spent marketing that unit. These commuter renters also will probably expect less amenities then the visiting renters who are retired or semi-retired and looking for more recreational activities to fill their spare time.
Although the situation in Fort Lauderdale is very specific and particular to this city it also is illustrative of how geography and population demographics can play an important part in how market rents are determined.