PRICING RENTAL PROPERTY
People have an emotional response to money. They love it, want it, and fear losing it. Often markets are described in the terms of fear and greed. Price is not an objective value of the item. Rather, price is the perceived value placed upon an item by a subjective person. We can also think of markets in terms of scarcity and abundance, or supply and demand.
There are many times when we do irrational things with our money. For example, how many of us have bought the 1 gallon pail of ice cream because it is cheaper per ounce than the 1/2 gallon box of ice cream, only to have the gallon of ice cream crystallize in the freezer because we didn’t eat it fast enough? In the end, we spend more money per ounce of ice cream consumed by buying the 1 gallon vs. the 1/2 gallon. This is just a simple example, but if we took the time to examine the economic decision we make on a daily basis because of the emotions of fear and greed, we would be shocked by how emotionally flawed our money decisions really are. Consider coupons, Buy One Get One Free, Loyalty cards, sales, rebates, 10 for $10, etc. All these gimmicks are not meant to save the consumer money. They are carefully planned strategies to get the consumer to buy more. With that said, how can a property investor use human emotion in their favor without being manipulative? First, we must understand what the emotions are and how to work with them.
Greed: This involves both Resident greed and investor greed. Often, investor greed takes the form of consciously over-pricing the rental. Investors begin thinking about how much more money they would make if they could just get the Resident to pay $100, $150, or $200 more per month. The prospect of making more money will eventually end up impacting their market perspective and will affect their decisions.
Resident greed takes the form of finding a good deal. Resident greed is the emotion that rental scammers use to fool their victims. By grossly underpricing a scammed property, the scammer preys upon the irrational greed of the Resident. The Resident will do irrational things such as giving the scammer their bank account information or even sending the scammer a money order because they don’t want someone else to grab this “awesome deal” before they do. They come to find their emotions have led them into the scammer’s trap.
When the emotion of greed causes a landlord to overprice a rental, they short circuit the Resident’s emotion of greed, and the Resident’s greed will opt for a similar property that has a lower price. As time goes on and more Residents pass on the overpriced property, the Resident emotions will turn to fear because of the length of time on the market. The property takes on a perceived stigma. Potential Residents will ask and wonder why nobody has rented the property for so long. They will build assumptions in their mind that will create confusion, and a confused mind always says no.
Now, the investor has not only lost the opportunity to use a Resident’s greed to make a buying decision, but they now have an uphill battle to overcome any other potential Resident’s fear of renting an undesirable property. In order to overcome Resident fear and again activate Resident greed, the property will truly have to be too good to pass up. However, this means that the price will have to be discounted far below the market value in order to attract a Resident.
The sweet spot is to price the rental slightly below the market at the time you list the property. The successful investor will have to control their own greed so they can capitalize on the greed of the Resident. With the property newly on the market and slightly underpriced, the prospective Resident thinks it is a good deal and decides to grab the rental before someone else does. Because the property rents quickly, the cost of vacancy is minimized. Because the property is seen as desirable, the investor is not left with a stigmatized property that must be rented at a steep discount.
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