Higher Rent Equals Higher Returns... Right?
- May 22, 2019
- 5 min read
Updated: 5 days ago
Why Higher Rent Doesn’t Mean Higher Profit
It seems pretty straightforward: the higher you charge for something, the more money you expect to make on it. Whether it's a retail product or a service, the first instinct most of us have is to charge the most we can for what we're selling. Although there is some truth to that, when it comes to rental property pricing strategy, that is not always the case.
In this article, we'll explore how setting the right rent can actually make you more money over time. Many landlords mistakenly believe that higher rent equals higher returns. But that isn't always true when factoring in vacancy rates, tenant demand, and overall cash flow. Ultimately, setting your rent too high can actually make you less money... yes, you read that right — less money!
The Scenario: Higher Rent, Higher Returns?
Consider a situation where you’re evaluating a rental property to establish its market rent before listing it. You check current listings on Zillow, browse Apartments.com, and consult your wealthy real estate uncle — all in pursuit of the perfect rental price strategy.
"...higher rent is alluring... it may not make sense... and could actually wind up costing you big money in the long run."
Success! You determine that your 3-bedroom rental could likely fetch between $1,850 and $1,950 per month. But what if your estimate is slightly off? The rental market is unforgiving. A mere $25 price difference can either attract eager renters or leave the place empty and collecting dust. So, should you go higher or lower?
The Numbers: How Rental Pricing Affects Cash Flow
In the rental property business, consistently keeping rents competitive can be more advantageous than higher rates over time because it ensures tenant retention and reduces the impact of a small yet significant word: Vacancy. Pricing your rental property correctly and keeping it up-to-date is crucial for enhancing cash flow and obtaining refinancing benefits later down the line, and you can get up-to-date insights from sources like Redfin’s Housing Market Data.
Setting a high rent price can increase vacancy periods, resulting in cash flow loss. For instance, renting at $1,950 after 6 weeks versus $1,850 after just 2 weeks raises an important question: Is the higher rent worth the longer vacancy? Let's examine the numbers:
The Higher Rent Scenario at $1,950 a month
Total annual gross rent: $23,400
Six weeks of vacancy: - $2,860
Six weeks of utilities during vacancy: - $300
Six weeks of lawn care/snow removal: - $300
Net yearly rent after vacancy-related expenses: $19,940
And now...
The Lower Rent Scenario at $1,850 a month
Total annual gross rent: $22,200
Two weeks of vacancy: - $863
Two weeks of utilities during vacancy: - $100
Two weeks of lawn care/snow removal: - $100
Net yearly rent after vacancy-related expenses: $21,137
WINNER: Lower Rent of $1,850 by over $1,100!
Properties priced at the higher end of the market rent attract less interest than those at the lower end, despite both being within market range. Many real estate investing tips overlook how extended vacancies and reduced demand impact rental income and lead to lost cash flow as we have shown here. Setting a lower rental price can boost demand and increase cash flow.
Related: How to Analyze a Rental Property
Other Factors Affecting Rental Income
Setting the right rental price for your listing from the beginning is essential for maximizing cash flow. Consider management fees if you hire a property management company. Generally, most property management companies charge 100% of the first month's rent to secure a tenant, with monthly fees ranging from 10% to 12% of the rent, and they might impose additional fees like onboarding and marketing.
Yet other property management companies, such as G3 Management offer plans with fees as low as 9%, charge only 65% of the first month's rent to secure a tenant, and include many services that others charge extra for. Not all companies are the same, so conduct thorough research, as some even charge a flat fee regardless of rent collection, potentially leading to longer vacancies and increased property maintenance costs.
"Wait — I’ll earn less by pushing rents to the max and might even pay more later?" Exactly.
Pro Tip: The National Association of Residential Property Managers (NARPM) provides helpful property management industry standards.
So, Are Higher Rents Always Bad?
Let's keep things in perspective. It's important to set your rental price within market rates, but concentrate on finding the right rent range rather than the highest possible price. Consider the ideal rent range rather than aiming for a specific rent amount. Demand is variable and fluctuates based on factors like rental market demand, seasonal fluctuations, the property amenities offered, rental space quality, and property type all affect the optimal rental price.
Pro-Tip: Your market rent should account for these changes; Investopedia does a good job describing how seasonal rental market trends affect rents.
If your market analysis indicates that your market rent range is between $1,850 and $1,950, it suggests that your rental will likely rent within this range. While it's true that you could rent it for $1,950, as the analysis suggests, the question remains: How long will it sit vacant before you secure a tenant? Although a higher rent is appealing, considering the factors mentioned, it might not be wise to list at the upper end of your range, as it could ultimately cost you more in lost revenue over time.
How to Price Your Rental Property Properly
To set the best rental price, follow these steps:
Determine the market rent range. Analyze comparable rental properties in your area to see what similar units are leasing for.
Factor in the time of year. Rental demand fluctuates seasonally—listing at the right time can improve occupancy rates.
Consider listing timing. Most desirable renters search 6 weeks in advance. Listing at the start of the month maximizes exposure.
Optimize rental pricing strategy. Avoid overpricing to prevent higher vacancy rates and deterring quality tenants.
Screen tenants carefully. Always follow your tenant screening guidelines to secure reliable renters who will stay long-term.
Stay updated on market trends. Monitoring rental market shifts helps you adjust pricing and stay competitive.
Pro Tip: Using rental analysis tools, conducting real estate market research, and staying informed about rental trends will help you maximize rental income while minimizing vacancy losses. Use a free tool like Rentometer to quickly compare your rent to similar listings in your area—it's an easy way to validate your pricing strategy before you list.
Final Thoughts
Higher rent doesn’t always mean higher returns. A well-priced unit:
Rents faster
Has fewer vacancies
Improves long-term cash flow
Makes tenants more likely to renew
So while it’s tempting to shoot for the top of the rent range, remember: cash flow > ego. Be strategic. Price smart. And watch your investment thrive. By pricing rental properties strategically, you can attract quality tenants, optimize cash flow, and achieve long-term investment success.
Related: Build Wealth Through Real Estate
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About the Author Ricardo Reis - Learn About Ricardo
Entrepreneur, Inventor, Investor, Military Veteran. Ricardo is a member of G3 Management & Investments a division of Great Lakes Real Estate and a real estate professional. He is a real estate professional and a successful real estate investor for over 15 years.
NOT INVESTMENT, FINANCIAL, LEGAL, TAX, OR OTHER ADVICE: This blog is for informational purposes only and not a substitute for professional advice. We do not offer advice, solicitation, recommendations, or endorsements. You are solely responsible for evaluating the information's merits and risks. Always consult a qualified professional before acting.
