6 Ways to Set Your Apartment Rents
Learn how to set rental rates for your multifamily property by examining these six key data points.Better Financing Starts with More Options$1.2M offered by a Bank at 6.0%$2M offered by an Agency at 5.6%$1M offered by a Credit Union at 5.1%Click Here to Get Quotes
So, you're looking to set rents for your apartment building? It's not rocket science, but there is some nuance to it. We've got six data points to help you determine the perfect rents for your multifamily property.
6 Factors for Setting Your Rents
Before we get to it, let’s introduce Joe.
Joe owns a 20-unit building in Nashville. His building is well maintained and in a desirable location, but he's struggled in the past to fill vacancies. He's charging $1,750 per month for his one-bedroom units. We’ll use Joe’s property through each of the six data points below.
1. Location, Location, Location
When you’re evaluating rents for your apartment building, you better make sure you know what's going on in your neighborhood. Location is key, and it can make or break your rental income. Let's break it down.
First off, crime rates are a huge factor. No one wants to live in a warzone, so if you're in a high-crime area, you're not going to be able to charge top dollar. On the flip side, if you're in a safe and quiet neighborhood, you may be able to charge a bit of a premium.
Next up, check your surroundings. What's nearby? Are there parks, grocery stores, cafes, and restaurants? If you're in a location with easy access to all the essentials, you can charge a bit more. If your tenants have to drive 20 minutes to get a carton of milk, that’s not exactly a strong location.
Last but not least, walkability. People love to walk these days, so if your location is easily walkable, you can bump up your rents a bit. But if your building is in the middle of nowhere, you may need to lower your expectations.
Joe’s building is located just off Gallatin Pike in East Nashville. While it’s a pretty good distance from downtown, there’s a bus stop nearby that offers direct service to the city center every 10 minutes. There’s a Kroger-anchored retail center adjacent to the property, too, which gives the property a nice bump in terms of its convenience factor. The crime rate in the neighborhood, however, is a little bit higher compared to the metro average.
Let’s think about how this location impacts Joe’s rents. The metro average for Nashville is, say, $1,800 in this example. Considering the strengths of its location, Joe may be tempted to charge a little more — but he must tread carefully. The higher crime rate may lead fewer tenants to shell out more than the market average.
2. Square Footage
This one's pretty simple: larger units should cost more, right? But how much more? One quick way to assess this is by looking at the average price per square foot for similar units in your area, and adjust accordingly. Keep in mind that tenants will expect more space for their money in areas with poorer locations as described above.
Example: Let's say Joe’s 650-square-foot one-bedroom apartments have modern fixtures, hardwood floors, and large balconies. Based on similar apartments in the neighborhood, you might be able to charge around $1,900 per month for these units.
However, if Joe notices that demand for larger units in the neighborhood is high, he might be able to charge closer to $2,000. On the other hand, if most renters in the neighborhood are looking for smaller, more affordable units, you might have to lower the rent for your larger units to attract tenants, say around $1,700 or $1,800 per month.
In Joe’s case, most of the renter cohort in his area is looking for smaller apartments. That’s great news for his one-bedroom units, but he begins to consider offering renter concessions for his larger vacant units.
You’ll want to first look at the amenities that your apartment building already has. These can greatly affect the rent prices you can charge. It's important to evaluate your amenities and compare them to other similar buildings in your area.
Before anything, you need to make sure that your amenities are actually in demand in your market. Take a look at other apartment buildings in your area and see what amenities they offer. If most buildings in the area have a pool, then having a pool might not be enough to justify higher rents. But if your property is the only one with a fitness center, that could be a major selling point.
Even so, your analysis shouldn’t end there. Going with the fitness center above, if your property’s gym is poorly maintained and equipped, it may not be that useful for your residents — and they may prefer to rent at a place next to a retail gym they can use.
Finally, make sure you understand the costs of operating your amenities. A perpetually switched-on chocolate fountain in the lobby and free champagne every evening may attract renters, but that’s a bill that’s going to creep up on you really quick, and the higher rents may not be enough to offset those costs. (Though, if you do add those amenities, let me know — I’m up for a move.)
Joe’s apartment building has a fitness center, a pool, and a rooftop terrace with views of the area. These are all great amenities to have, for sure. The thing is, nearly every notable apartment building nearby also has a swimming pool and a fitness center. Because of that, he can’t really justify charging more because of this. The terrace, however, is a bit of a unique feature in the neighborhood. Still, Joe should seriously consider if it’s valuable enough to justify higher rents.
One of the most important considerations in setting rents is what your competition is doing. Take a look at what your competitors are charging, but don’t do it in a vacuum. If a neighboring building with larger units and higher-end amenities is charging more, it’s not a great comparison if you’ve got an outdated apartment complex in need of renovation.
Once you’ve determined which properties you’re competing with, then you can begin looking at rents. If you find you’re on the high end, think very, very carefully before bumping rents up again. On the other hand, if 75% of your comparable neighbors are charging more than you, that could be an opportunity to increase your property’s rents.
Joe does some market research in East Nashville and finds the following:
Joe's Apartment Building
Large, 55-unit building with two swimming pools. Maybe a little more luxurious than my property.
Nothing special, just a 15-unit building with similar amenities to my property.
Small, 10-unit building. Smaller floorplans than my building.
All studios, but same size as my one-bedroom units. Recent upgrades. It's a bit of a hike to the nearest shops.
From this, he notices his rents are a little lower than the average, but there’s no single reason why. He may be undercharging, sure. But before raising rents, he ought to examine every aspect of his and the other properties — and even then, it’s a good idea to be very conservative with rent increases. After all, he doesn’t want his vacancies to blow up.
The demand for your rental property is a key factor in setting your rental rates. If apartments are in high demand in your neighborhood, you can generally charge higher rent prices. If demand isn’t incredibly high, it may be a good idea to offer rent concessions or even lower rents to fill vacant units.
To assess demand, start by looking at any relevant metro reports or other multifamily data you can find. Vacancy (or occupancy) is commonly used in these types of reports, and it can shed some light on how well your own community is doing. Demand isn’t the same in every neighborhood in a market, of course. Looking at other demand drivers — think local schools, the job market, and transportation options — can help you understand how your neighborhood is faring.
Joe’s East Nashville property has two vacant units right now. That means he has a 10% vacancy rate. That’s not ideal, compared to the Nashville metro vacancy rate of around 4%, but it’s just two units. If he finds he has significant trouble filling them, he may wish to consider offering some move-in concessions, but lowering rents wouldn’t be a good option for now, as he’s already reviewed competitive rents in the area.
6. Operating Costs
At the end of the day, you need to make a profit. To do this, it's important to look at your operating costs and ensure your rental income is covering them. Operating costs can include maintenance, repairs, utilities, taxes, insurance, and more. These expenses can add up quickly and significantly impact your bottom line.
Looking at operating expenses isn’t necessarily a good way to set your rents — a resident may not care if her $6,000-per-month studio doesn’t give you enough overhead to cover the chocolate fountain/champagne amenity if she (somehow) hates chocolate and bubbly.
Operating expenses are still important, though, to use as a floor. If you have operating costs that work out to roughly $1,000 per unit, it would be extremely unwise to charge rents of $1,000. You’ll need to pad that for unforeseen circumstances — if you need to replace the cabinetry in a unit, for example, that may not be budgeted in your monthly expenses. So, realistically, you should set rents at least 5% or 10% above your total operating costs, at a minimum.
Of course, another angle you can take here is expense reduction. Auditing your costs may lead you to find some efficiencies, and that's great. Often something as simple as a multifamily refinance can significantly boost your bottom line.
Let’s take a final look at Joe’s 20-unit building. He crunches the numbers, and while he’s operating at a profit, it’s not a significant one. For every dollar of expenses, he earns $1.03 in rent. He realizes that isn’t likely sustainable, and he plans to increase rents a bit to ensure he’s earning a reasonable profit and able to put enough cash into reserves.
The Final Word
Well, congrats! You've learned the basics of how to set rents for your apartment building.
Just keep in mind, it's not only about crunching numbers. There are plenty of other factors to consider. And even when you've taken all of those into account, setting rents can still feel like it’s more art than science — and that’s because it often is.
But don't worry: With a little bit of research and a lot of trial and error, you'll be able to find the sweet spot that maximizes your profit without pricing out your tenants.
Let's bring Joe's apartment building back into the picture. Joe has done his homework and has taken all of the factors we've talked about into account. He's figured out his operating costs and set his rents to cover them. But he's also mindful of the competition and the demand in his area, and he's made sure that his rents are in line with what other landlords are charging for similar properties.
So, there you have it. Setting rents can be a complex process, but if you're willing to put in the time and effort, you can ensure that your apartment building is a profitable and successful venture.