Do you wonder what metrics you should evaluate before setting your rental rate? Or how specific changes in the market can affect your investment’s performance? You’re at the right place. This article highlights rental property demand and the top factors that affect rental rates.
If you want to know what to consider before you buy off-plan property, or invest in a vacation rental, stick around. We’ll explore the definition of rental demand and how supply and demand factors can affect your rental rates.
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What is Rental Demand
According to real estate experts, rental demand refers to the willingness and desire of people in a particular area to rent properties at a given time. In other words, it highlights how many people in the market are looking for a place to rent. For savvy investors, it is a crucial indicator of potential revenue earnings. After all, there is a close relationship between higher rental demand and lower vacancy rates.
However, estimating how many people are willing and ready to rent a home isn’t a straightforward equation. It requires a lot of forethought and consideration of various factors. Many landlords find it’s best to seek the assistance of rental management professionals with more experience in the field. Here’s a quick run-through of some of the key aspects these experts consider:
Supply and Demand Factors that Affect Rental Rates
Price is often the foremost consideration for many potential tenants during house searching. After all, responsible tenants want to be sure they can consistently meet up with the rent for at least a year. Thus, it’s not uncommon for people to narrow their searches to specific areas. Most neighborhoods have a price range for certain rental types wherever you live.
For instance, the average rent for a two-bedroom apartment in Manhattan is $4300. If you were to double your price for a similar rental, you would risk chasing away potential tenants. As a result, you might end up losing money on vacancies. However, if you drop your price by half, expenses could cripple your business. Hence, the cost of rentals in the same area can affect your rate, so it would be beneficial to learn the art of pricing your rental property.
As we highlighted in the previous point, the average price in an area can dictate your rental rates. However, your property’s location can also affect demand in other ways. Proximity to amenities like public transportation, good schools, restaurants, and shopping malls can weigh heavily on your pricing. The closer your house is to these services, the more desirable it becomes. For example, it’s not uncommon for homes near campus to be more expensive in a college setting. Since people are willing to pay for proximity, those landlords can make more money on similar rentals than their distant counterparts.
Another major priority for tenants before moving into a new home is the neighborhood’s safety. Places with lower crime rates tend to attract more people, who are often willing to pay more. However, if crime rates are high in your area, an equally high rent could drive away potential tenants. After all, what would be the point of paying so much for compromised safety? Although you can boost your security with significant upgrades. Unlike average prices and public amenities, improving your tenants’ safety isn’t totally out of your control. You can invest in smart locks, CCTV cameras, and state-of-the-art surveillance systems.
The potential for growth in an area can also be the perfect catalyst to increase rental demand. Investors often see neighborhoods as an opportunity to buy in early and watch their equity grow. Sometimes interest in a new place can create a snowball effect, where everyone wants to buy into the trend.
Time of the Year
While the time of the year can affect rental demand generally, it is especially applicable to vacation rental investors. For regular short-term and long-term property owners, peak periods can vary with the season but usually remain stable all year round. However, if you own a beachside apartment in Santa Cruz, spring would probably be your busiest period. On the other hand, your rental might not be fair either during fall or winter. Therefore, some landlords prefer to opt for ‘evergreen’ vacation spots. The property demand in such areas is less likely to be affected by the time of the year.
Regarding rental property demand, there are several factors to consider as a landlord. Keeping your business afloat depends on balancing your rental prices with market forces like price, location, safety, and more. Thus, it would be best to consider how these criteria affect your investment portfolio and act accordingly. You should consult a professional property management company if you need help making better financial decisions. These experts can offer practical solutions to achieve the best possible outcome for your business in any market.