Why do some LL's intentionally set their rents below market rent? Why would any LL choose to settle for less rent than the market will allow? Am I missing something here? Is there any business justification for this practice?

Do LL's compete with each other (like retail stores do) in trying to see who can steal each other's customers with lower rents?

Fill em quick and keep em full.

Because they don't want to fix them up to community standards?

So they can say, "What you see is what you get, priced accordingly?"

We have a local landlord whose places are known to be less than stellar.

Cheaper than ours, and he is always in eviction court, and people talk about him as a slumlord.

NE,

Since I rent at above market, I do not have to raise rents every year. I wait for the market to catch up with me but I do not lose rent money in the meantime though.

Roy, when I lower my rent to slightly below market. I get the same problem, but they do not literally show up at my doorstep. I simply ignore the emails if they tell me they don't make enough or have poor credit, or call them once for a phone screen.

Yo dome it's a mindset that is what they need to do to rent them quickly. And, likely they don't actually need the income, they've owned them for years they've been paid off for years.

I ask myself the same question when landlords wait until a tenant is three- four-five months before they evict.

We set ours at or slightly below. Tried raising them. Turnaround was much slower and people didn't view us as more affordable. A lot of people applied that could not qualify and afford the rent.

Contrary to some others here, we prefer not to have turnovers. We keep it affordable. They have the mindset that we are affordable AND quality, so they feel like they don't have to shop around.

We tease lower rents in the winter months, but at the contract turnover- which we have set to end in spring- we raise rents.

We set ours at or slightly below. Tried raising them. Turnaround was much slower and people didn't view us as more affordable. A lot of people applied that could not qualify and afford the rent.

Contrary to some others here, we prefer not to have turnovers. We keep it affordable. They have the mindset that we are affordable AND quality, so they feel like they don't have to shop around.

We tease lower rents in the winter months, but at the contract turnover- which we have set to end in spring- we raise rents.

Roy,

I'll answer your question with my usual dose of whimsy and such. It's a study in philosophy of marketing. I'm going to hop into the world of retail marketing to make an analogy. If you want the direct answer, skip the next 2 paragraphs.

Basically, it boils down to who are you striving to be: Wal-Mart (cheap), Macy's (middle), or Tiffany's (top dollar)? Keep in mind this philosophy doesn't confine itself in a one-to-one relationship with C, B, and A rentals. There is segmentation within each individual class of rentals. You can by a Tiffany's (top dollar) land lord in a Class C hood like you, or likewise a Wal-Mart LL in a Class A hood. I am a middle of the road land lord in a Class C hood. Call my model "Target": I'm above Wal-Mart and only a small step below Macy's.

If you look at the market capitalization of those companies, Wal-Mart ($244 B) outshines them all. Macy's ($7.1 B), Tiffany's ($11.6 B). If you're willing to deal with the "make it up in volume" crowd, it appears to be the most profitable and expansive market to cater to in retail. What's funny is Amazon now has a market value twice that of Wal-Mart. Other discount retailers are languishing: K-Mart, Sears, etc.

That is one major problem with being the cheap guy on the block is someone else can always beat you in the race to the bottom dollar, whereas high-end retail stores like Tiffany's rarely if ever play the discount game. They cater to top net worth clientele and "slumming" with "Buy One get One" coupons and "90% off" sales would undermine their primary market segment.

Side note: If Google ever decides to hop into online retail in a serious way, I think Amazon is in trouble. They trounced the competition based on three things: easy shopping, no sales taxes in most states and low prices. They've lost the no sales tax advantage. Someone with the exposure, money, and power of Google could reach the broad/scattered retail market if they set their minds to it. Same as Wal-Mart did to Sears. Right now Amazon's P/E is insanely high (551 vs. historical average of many companies around 15-20). This is because they are the only serious contender in retail e-commerce. They are losing their coveted "one click" patent this year. In the end, they are nothing more than the currently fastest running in a race to the bottom model, so all someone needs to do to beat them is race just a tad faster. Races are won by milliseconds.

Back to topic: I see the race to the bottom with apartment complexes offering a month's free rent in addition to $99 deposits. Fortunately, I am past that point in the present market, but if things go south who knows? I'll do what I have to do to stay competitive. Fortunately, I am not in direct competition with apartments since I only do SFH's and a few plexes.

I think we all have our strategies and as long as we are happy with them then go forth and conquer. I price slightly under market (2%) and it seems to keep me avoiding expensive, extended vacancies.

Sid, the BIG BIG BIG difference between retail and rentals is that rentals have a not-insignificant cost to the consumer to switch providers.

If I want to shop at target instead of walmart or vice versa, the only cost is the time and gas difference of each trip. But if I am currently renting somewhere, and have a choice to renew or rent elsewhere, both at the same nominal monthly rent, the latter is actually more expensive.

In order to switch rentals, a tenant incurs cost of time looking, looking, and signing for a new rental, moving costs, cost of floating a new deposit while waiting for the old one to be returned, and the uncertainty that the experience (repairs etc) will be the same.

Landlords who underprice consistently do so because they mistakenly believe that underpricing will retain residents. Also, these same housing providers do a poor job of marketing, and operate inside a pool of tenants, believing that this small group is the entire market.

I do it pretty much because I value hard working people who aren't receiving government assistance. My places are better than more expensive ones. My tenants hardly ever move. Our rents have skyrocketed in the past few years.

I am too empathetic and could be making more money but I don't need to so I share the wealth so-to-speak.

I have waiting lists and don't advertise so I typically have a good quality tenant pool to pick from whenever I need to.

I'm fine with your method David. I do something similar, except I do it on the front end using a "McDonald's" approach. I start out below market slightly, but end up above market with pet fees and bi-weekly payments. "Do you want fries with that? (pets) How about an apple pie? (bi-weekly rent)". Sometimes I have someone who wants both. In those cases, my monthly rents are usually higher than my competitors.

The question was, "why do LAND LORDS do what they do?" I can give one answer to that, being a land lord.

Price of a rental depends on many factors. Some of them have to do with appearance of the unit and building, noise level inside and other things.

I view it as hobby vs full time professional landlords.

All of my properties are multi family so their market value is directly related to their yearly income. So as the manager of my business its my duty to myself, my business partner, and my bankers to get as much income as possible out of these assets.

Mom and pops on the other hand with a few SFH rentals either don't know they can get more, don't care, or are to lazy and run them like a nice side hobby instead of a business. My aunt for example has one SF rental and just doesn't care that she could get say $2,100 a month. She rather just take $1500 from a "friend" forever and not deal with it. That's fine if its a hobby.

YMMV

It all comes down to what works best for you and how hard you're trying. I've tried multiple approaches to pricing units and have found what works best for me.

Sid, I'm enjoying your analogy. Like some of the tenants, I'd rather shop at Target and get quality for less and think I got a deal, than go to Tiffany's and have buyers remorse thinking I got it stuck to me. I wouldn't ever go back. And I would tell ALL my friends how expensive it was at Tiffany's, versus the experience at Target. If after the sale, the sales rep from Tiffany's said, " hey, I offer diamond earrings for $5 extra" I say to myself," don't you already have enough of my money?" But if the Target endcap says,"great buy! $10 diamond earrings" I think, "I can do that. I already SAVED a lot."

They will continue to think they got a great deal as long as you don't do anything outrageous and keep the quality of unit in check.

I don't know if many really take into account the costs of moving. There are people that move to "save" $15 a month. And some never bother cleaning to get their deposit back. And their new Tv has to fit in their new place-get what I mean?

People enjoy believing they got a deal. Even when it isn't.

Precisely, Amy. One of the often overlooked parts of Dave Ramsey's "Financial Peace University" covers this topic of bargaining, deals, opportunity cost-analysis, and looking at total cost of ownership. I probably learned more out of that segment than any of the others except the last one on Generosity. Many people think sticker price is the only number to consider when making a purchase. Just so with some renters.

I imagine this scenario: That LL wants to raise my rent $25/month. I'll show him and move! Let me see now...gotta look around at some places, apply, pay an app fee, pack, take a couple days off work, rent a truck/trailer, bribe some friends with beer and pizza, come up with a new deposit, new pet fee, carpet cleaning fee...

If ya had 10 paid off SFH's, (Easy Street)

how much differently would you manage them,(financially)

compared to having 10 financed SFH's ? (Desperation)

Also, what if these SFH's were (all) paid for,

by Tenant(s) 3 and 4 times over and are Now worth

3 and 4 times as much money as you paid for them.

These are all SFH's without (Code Compliant) any Bells and Whistles !

Sid,

Several years ago, I tried to organize a local LL club and at the first meeting, I stood in front of 10 local LL's who were all renting their houses well below market rent. I asked one of them why he did this and his answer was "that is what the LL next door gets".

I then told all 10 LL's that you all are getting the same rents that LL's got 30 years ago! ($350.00/month). You all are $200.00/month below market. They all looked at me like I was from Mars! One of them even accused me of "Collusion' in a vain attempt to establish minimum rents for my entire city!

I use to keep it just under the market rates with the thinking it retained tenants and filled quicker. Doesn't really happen..

Now, I'm towards the top of the market. To fill them quicker, I made my process easier to navigate vs. other landlords.

RB,

What you described is what I have except I have 32 paid off rentals. They aren't worth 3-4 times their original cost but many are worth 2-3 times what they cost (about half anyway) others at 30-50% more and a few more.

So that is probably why, for the tenant who has been there eight years giving me virtually no issues at all and who has paid in rent enough to cover my purchase price, I have below market rent.

I would definitely be less generous if circumstances were different.

Different strokes for different folks. I am a small time landlord of SFHs. I don't have my own crew, and getting skilled labor at any price (sorry David) can be tough in my small town. I have a busy primary job and I must keep my turnovers to a minimum.

When I had 100 units in mid city, Koreatown, the bread and butter area, my buildings were on the old side with little extra's. So to keep my tenants happy and for them to stay put, my rents were very competitive ( under market).

I did have fresh paint, new carpeting, good working appliances, a parking spot, upgraded fixtures and everything worked well.

Cjo'h,.

I hope you are doing well.

If I actually find $10 diamond earrings, I'll be careful not to buy them. That and oceanfront property in Arizona. Oh, and I've never been in Tiffany's either.. ;)

Roy of AL, I bet if you would do a visual inspection of the 20 - 30 year landlords. I bet there would be a high percentage that the units needs work on the interior and the exterior. And its possible that some tenants have been there for 20 or 30 years. There are many mom and pop landlords that have been in the business and the units are paid off and most likely have not put much into the units. It's the same thing as many of the steel mills the owners of the mills took all they could out of the business and never updated the mill to the newer methods of manufacturing. Unfortunately when they decide to get out of the steel business they will not get top dollar for the business. The same is true for the 20 to 30 year landlords they feel they made their money during the 20 - 30 years and they will get out what they can when the units are sold. HOWEVER they do not realize the money they lost in low rents and the money they lost in not updating the units with the tenants in them to keep their rentals at market values. PLUS because they do not inspect the unit they have no idea the condition of the unit inside and outside as well. The tenants are not going to tell them about problems because the tenant does not want to have their rent increased due to repairs and updates. The tenant will slap some lipstick on the unit and they are comfortable with living in the units and the landlord is comfortable with extremely low rents. When there is a major issue and the tenant calls them they will make the repair or have a repair service make a bandaid repair to the unit. Because the landlord does not want to spend any money on the unit.

Landlord has 10 rental units $100 below market rental for 120 months. Thats $1000 per month, 12,000 per year. 25% tax bracket Plus some of the money would be put back into the unit for maintenance and updates. The updates are written off over time too. 10 years thats 120,000 lost rents over a 10 year time frame. There may be some mom and pops that own ten units.

There are towns across the country that are not booming the area may have lost industry. However there is still a need for rentals in the town. Landlords buy units do the needed repairs and not go over with costs. They keep their rents below market because they are able to do it and can not get top dollar for the units. They continue to make money because they got a deal on the units and rents are working for them.

Some landlords do not do credit checks they see the money and rent to the next tenant in the door. They are playing russian roulette some are lucky and do fine others are in a revolving door of new tenants.

Roy of AL does not make sense why many landlords keep low market rents. When they can be making more money. Oh well!!!

I'm one of those, Roy. I have a SFH that is spacious and clean, but does not have some of the upscale amenities like granite countertops and jetted tubs. Most of my competition in the same number of bedrooms has 1 more full bath than mine. I price it below the competition's places, I emphasize in the ads that while this place is not going to show well on HGTV, what the tenant gets is a well-maintained house on a big lot that backs up to a field, on a quiet street that just happens to be in a top school district.

NE said: "Roy, if you're setting the standard, then why worry?

I am not worried but I do care about people other than myself. When I see someone (ie. LL) doing something that does not make sense, I step in and say "Why do you do this?" Many times their answer does not make sense either.

In my town, McDonalds sells their Big Mac for $3.89 because that is what the market will pay for it. It seems there just too many LL's who want to sell that same Big Mac for $2.89. Why? I feel like I am beating a dead horse here.

Hi Wilma of PA, WHAT IF??? You did a few improvements to your rental unit. YOU have a major plus you are in a top school district. I am not saying taking it to the HGTV Showcase. However consider this IF I read between the lines and I assume your unit is a one bathroom. It's a spacious unit add a 2nd bathroom, nice double vanity in the master bathroom; a larger shower, a high seat oval toilet. Paint the entire unit: the basement, first floor and if second floor in a gray tone with off white trim, paint the kitchen cabinets in a darker gray tone or a sage color. If there is carpet remove it and install Vinyl Click Floor throughout the entire unit. If there is hardwood floors thats great then install the Vinyl Click Floors in the areas that have older vinyl. There are several suppliers like Home Depot, Lowes or Lumber Liquidators that stock the Vinyl Click Floor. In the basement if the floor is concrete paint it with a high quality floor paint. You could spend $8,000 to $20,000 depending on the bathroom costs, vanities, toilet, paint, kitchen hardware updates, lighting updates. PLUS you don't need to install granite countertops buy a very nice laminate there are some that look like granite.

You may want to consider updating the windows and exterior doors for higher energy values. This is not urgent but its a consideration.

Remember you can do the updating of the kitchen and the bathroom, adding a bathroom AND painting the unit with your tenants in the unit. Then you are not losing rent with a vacant unit. Some of the work can be written off on your taxes immediately other work would be major improvements and deducted over time on your taxes.

It may sound like a lot of money $8,000 but you can increase rents by $100 to maybe $200 a month it will show very well especially painting an old looking basement and making repairs to a basement that may be damp can be a major improvement to your unit. IF you keep the unit for 5 years and decide to get out of the landlord business You will have a lot of the updating completed and will do only touchup work to place the unit on the market. The best option would be for your tenant to purchase the unit and you hold the note thats a major benefit for you to make more money on your unit.

OR do nothing to the unit and continue renting and making money off the unit as you have been doing.

----

As a Landlord how often do you paint your unit for long term tenants???

Timidity. Same as not raising rents annually.

They need to come to Convention and get some COURAGE!

Another,

We make our homes NICE! Clean and smell great. We don't get complaints about the prices being too high.

Whenever a rental applicant asks me why my rents are a little on the 'high side' and want an explanation,..I tell them this: Why does a Cadillac cost more than a Chevrolet?

Both autos have an engine, 4 tires, a steering wheel and will get you from point A to point B,...but the Cadillac cost more than the Chevy. My house is the Cadillac of this neighborhood. I challenge you to find the same house in this neighborhood for less money.

If you (applicant) want cheaper rent, I have another house you can look at but it is my 'Chevrolet house'.

Here's why I want to rent at or slightly above market from the beginning, and why we also don't often raise rents: a lot of people don't make much money these days and they DON'T get raises.

Most of my tenants barely qualify financially for our spaces - if they could afford more, they'd be renting the big houses around here.

WMH said "I like being able to use finances as a no-argument excuse, rather than more subjective issues"

What do you mean by this statement? I just need clarification. I agree with you 100% though.

Roy, I think WMH means that finances are a "line in the sand".

Either you make X times rent or you don't. It is an objective qualifier.

The rusty Vegas turned into Cadillac and Chevrolet.

Kurt, exactly. No stories, no subjective issues: it's just, "Thanks for your interest but your stated income is less than our required mandatory minimum of 3x the rent."

Saturday the 23rd.

Today I rented my 'Cadillac house' in a Class C hood at $100.00 above market. Now, I have just one 'Chevrolet house' vacant and that one should be ready to advertise on Monday.

Congrats Roy, Excellent that you are above market rents. Roy I agree it makes no sense why some Landlords keep their rents below market. I bet many of the LL's are mom and pop LL's that have been in the business for 20 or 30 years. They are getting below market rent, the units are paid off and they do very little to the units; therefore they are making money in THEIR business plan.

There are landlords that rent to the next person that walks in to the unit. The tenant has a pulse, money in hand for first months rent, security deposit and last months rent. Also they have a job!!! For Now... OH YEAH the LL rented the unit. HOWEVER, we know the outcome of this tenant. In most cases this tenant will be in court or moving out with delinquent rents owed, water and sewage not paid and damage to the unit. Unfortunately this LL did not screen the tenant with the application. As well as very little work was done to the unit by the LL the unit looks like it did 20 or 30 years ago...

There the LL the Mom and Pop keep their rents low and screen via their application, run a credit report and chose the best tenant from their applications. They may keep this tenant 10 years or more because they keep the rents below market. They do the necessary repairs and most likely the tenant does work on the unit by painting it and replacing carpet and/or lino. They may do a walk through during the tenants time in the unit.

There are LL's that do all the needed screening and keep rents below market. They paint the units but they don't update it. They are making money and offer a safe and nice clean unit to the tenant. They will do all repairs to the unit keeping it in nice condition.

There are LL's that update the unit keeping it in extremely nice condition and do all the screening, charge for extra perks and get above market rents. They are making money and continue to improve the unit. This unit can go on the Market for sale at any time IF the Landlord wanted to do it. AND IF the realtor made any suggestions to the improve the unit they would do it to get more money. Plus the management company makes any suggestions to improve the unit the LL does it. This LL has written off the work on their taxes and they are making money.

In each of these cases the landlord feels they are making money and they are very pleases with their rental investment.