How to Price Your Rental in a Small, Secondary Market

The time-honored mantra of real estate – “location, location, location” – drives everything from a property’s purchase price to the rental rate. It can even dictate how much or little you should invest in improvements.

Real estate markets are classified by location type. There are primary, secondary, and tertiary markets, sometimes called Tier I, Tier I, and Tier III. The market classification for your rental property will be a crucial consideration as you set its rental rate.

An area’s population and state of real estate market development determine its classification as a primary, secondary, or tertiary market.

Primary Markets

Primary, Tier I markets are typically larger cities of 5 million people or more, with well-established rental markets. Examples include Chicago, New York City, Boston, San Francisco, Los Angeles, Washington, D.C., and Dallas-Fort Worth.

These large metro areas are usually more expensive than other metro areas – for both buyers and renters – due to consistent demand for housing.

Secondary Markets

Growing cities are considered secondary markets; their growth creates demand as new people move into the area, supporting new business development and job creation.

These Tier 2 locations demonstrate more real estate market flux, creating attractive opportunities for real estate investors.

Secondary markets tend to be a population of 2 to 5 million people. They are usually less expensive than primary markets but still in demand. Examples include Philadelphia, San Antonio, Phoenix, San Diego, and San Jose.

Tertiary Markets

Tertiary markets involve a lower population density of fewer than 2 million people. The population is spread out across a bigger geographic area.

There is typically less reliable job growth. In a strong economy, tertiary markets can provide attractive investment opportunities as property prices are typically lower.

These areas may be more expensive to develop as many are rural or outside of secondary market cities.

But can be prime markets for real estate investors as the properties cost less.

Whether you invest in a secondary market, tertiary, or primary market, it is essential to consider market-relevant data to price your rental correctly.

The key to pricing rentals in a primary vs. secondary market

The whole real estate cycle – from the purchase price to rental rate and eventual selling price relies on intelligence gleaned from current, comparable sales data for properties in the same price range.

When you review these comparables, you will get a good sense of amenities and the property improvements for other properties in the price range. As you determine your target rental rate, the purchase price is one factor but not the whole story.

You may be able to invest a small amount in fixing up the property, add or improve its amenities, and charge a higher rental rate than similar unimproved properties sold in the past year.

How you need to look at properties in secondary and primary markets differently.

Demand for rental property is always a local story. You can’t take an apartment in New York City and compare it to a similar apartment in Des Moines. Even if both cities are the largest in their respective states, large is relative –Des Moines has a population of 210,000, and New York City’s population is 8.175 million.

Even within Iowa and New York, you have the full range of markets to consider. So how do you determine the rent?

In real estate, comparing neighborhood properties wins out.

While you need to be aware of overall rates in the city where you plan to buy, your rental rate should be based on going rates in the immediate neighborhood. Each neighborhood will have a range that extends across unimproved and improved properties.

High-demand primary markets are top dogs because they have low turnover and can command higher rents. Secondary markets can present many growth opportunities. You can still improve a property in a secondary market to make it more attractive to tenants.

This will also allow you to raise rents accordingly. Tertiary markets also offer good opportunities, especially when the primary and secondary market values seem overblown.

Comparing apples to apples

In any market, you want to rely on current, accurate information to complete your analysis. Rentometer pulls rental rates from all online sources for current listings to provide you with accurate rental rates for any area. You can search within any state, city, or neighborhood to get the most up-to-date picture of rental rates.

Let’s compare rates for 2-bedroom, 1 1/2 bath rental units in Des Moines. The city’s average rent for this property type is $1,186 per month, but rates range from $943 to as high as $1,429. This range tells you that the right purchase price and a few property improvements could create a nice cash flow.

Comparing similar properties in a secondary market

Going a bit deeper, let’s compare three different neighborhoods in Des Moines: Downtown Des Moines, Bloomfield-Allen, and Merle Hay. Downtown has the highest average rents at $1,482 per month, while Bloomfield-Allen and Merle Hay show average rents of $890 and $891. Looking more closely at each area, you’ll find that Downtown has an entirely different culture and amenities from both the Merle Hay and Bloomfield-Allen neighborhoods. And while the two other neighborhoods are similarly priced, they have different amenities, culture, and crime levels.

Suburbs Apartment Rents Close to Their Pre-Pandemic Peak

Though the rental market in major cities has been hard hit by the Coronavirus pandemic—plagued with a mass migration by remote workers seeking larger homes, as well as relocations because of social distancing concerns—it appears that the suburbs have not just survived COVID-19’s wrath, they’re thriving in spite of it.

While rents have declined steadily in the larger, denser, principal cities at the core of each metropolitan region, rents in the outlying suburban areas have, on the whole, rebounded to pre-pandemic levels,” according to a new report from Apartment List.

From June through September, rents dropped in cities but “quickly rebounded” in the suburbs from losses that were seen from March to June across all of the property type’s markets, the report stated. In October, rents were 0.5% higher than they were at the start of the year, and came in just under their pre-pandemic peak in March.

Suburbs are outpacing cities across the country. In 27 of 30 large metropolitan areas tracked by Apartment List, “principal cities are experiencing faster rent drops or slower rent growth than their surrounding suburbs. And in 11, including major economic centers like Atlanta, Dallas, and Philadelphia, apartments in the principal city are getting cheaper while at the same time apartments in the suburbs are getting more expensive.”

The data jibes with other recent research concerning the impact of move-outs from cities, and the resulting strength of the suburbs. A recent report from Redfin showed that in the third quarter 29.2% of Redfin.com users looked to move to another metro area—the highest share since Redfin started tracking migration at the beginning of 2017. The uptick is partly due to the pandemic, Redfin stated, as well as the now pervasive work-from-home culture.

Short-term suburban rentals—which it defines as one-to-two-year lease terms—could be demand drivers for residents seeking work-from-home space and outdoor access. Suburban renters typically seek larger units, such as two-to-three bedroom apartments.

If this work-from-home trend is going to be a little bit longer term, people will feel more comfortable with moving out into the suburbs.

Efforts to socially distance also are fueling shifts away from major cities to the suburbs people just don’t want to be in enclosed, dense areas.

6 Tips for Setting Rents, Winston Rowe and Associates

If your rent is set too high, the property can sit on the market and you will miss out on monthly rental income.  And if the rent is set lower than the competition, simply put, you will leave money on the table.

Whether you own or manage one rental property or hundreds of rentals across the country, you need to be able to set fair market rents confidently.

As we know, rents vary greatly from market to market, but can even differ from one street to the next within a single neighborhood.  Obviously, numerous variables impact the rent you can charge for your rental unit, including location, type of building (duplex, apartment building, etc.), size/square feet, age of unit, number of beds/baths, and amenities (i.e. parking, AC, pool, roof deck, and so on.)

Don’t be fooled that any one rent comp, property manager, or local real estate agent can tell you the perfect fair market rent for your property.  We recommend that you tap into a handful of resources to help you set rents confidently.

1. Find some rent comps to give you a starting point

Check local apartment listings using the local newspaper, online apartment guides, or websites like Craigslist and Rentometer to get a feel for the “going rents.”  Rentometer can give you historical rent trends for the area and a good starting-point rent.  You can further refine the rent from there by using some of the suggestions listed below.

2. Stay up to date on the economic and business activity in the local market

Is it thriving? Are stores closing down?  Economic activity is one of the key drivers of rental housing demand and it can affect the rental market in unique ways. For example the current economy in Boston, Mass., is hot! Rental housing is in high demand, leading many renters to forgo amenities and perks in favor of securing a lease. This means that landlords can afford to make fewer concessions when negotiating.

3. Check occupancy rates for your area

Are the occupancy rates trending upward? Good! The stronger the desirability of a rental, or neighborhood, typically the higher the occupancy rate – and higher market rent. It’s a question of supply and demand.  Factors that can affect occupancy rates include local millennial population, employment trends, housing supply, and new construction growth, rent prices, and the location and  condition of the rental property.

4. Chat with a local real-estate professional

Talk with an industry professional about their take on the market or a specific neighborhood. Local experts (property managers, brokers, agents, appraisers, and lenders) are especially good at identifying the drivers of housing supply and demand unique to your market – jobs, local ordinances, building permits, zoning for a new apartment building, etc.

5. Use “rent per square foot”

Whenever possible use square footage as a benchmark for searching rent comps. This allows you to encapsulate into a single number all the subjective variables of rent, and provides you with a basis for comparison across different units, locations, amenities, and so forth.

6. Check your local apartment or rental-housing association

These are great resources for research. They may provide information about local rent levels – past, present, and future. This is especially important for real-estate investors and developers.

Making sure your property is renting at (or close to) fair market rent is as much of an art as it is a science.  However, with the 6 tips for setting rents along with good current and historical rental data and a thorough understanding of the local market and market conditions, you can set rents with confidence!

Top Markets for Multifamily Development

Top Markets for Multifamily Development 

Research firms CoStar and MFP look at busiest markets for new apartment construction as a percentage of existing inventory.

Population is growing quickly in all of the cities where developers are planning to build the newest apartments, according to CoStar data. In addition, development can be a long, slow process. In many of these cities, the number of apartments completed over the last year is much lower than the number of apartments that developers have announced they plan to build.

  1. Miami

Building cranes still tower over downtown Miami—the busiest market in the U.S. for the planned development of multifamily housing. Immigration has kept the population of Miami growing, and that has kept developers busy planning new projects.

Miami is number one on CoStar’s list of markets with more than 50,000 units with the highest share of apartments under construction as a percentage of existing inventory.

Developers had 16,777 new units of multifamily housing in some phase of the development process in Miami in the third quarter of 2018, according to CoStar. That works out to 11.4 percent of the current inventory.

Research firm MPF counts 9,656 new rental apartments under construction in the Miami-Miami Beach-Kendell, Fla. metro area. (MPF only counts apartments that are physically under construction, instead of counting projects that have been announced, but may still be arranging their financing or building permits.) That’s equal to 3.3 percent of the inventory across the broader metro area.

  1. Salt Lake City

Salt Lake City is friendly to business and relatively inexpensive compared to many cities. That has kept its economy strong, helping to make the city number two on CoStar’s list of top markets for new development.

Developers had 6,527 new units of multifamily housing in some phase of the development process in Salt Lake City in the third quarter of 2018, according to CoStar. That works out to 9.9 percent of the current inventory.

MPF counts 3,237 new rental apartments under construction in the Salt Lake City-Ogden-Clearfield, Utah metro area. That’s equal to 3.1 percent of the inventory across the broader metro area.

  1. Nashville, Tenn.

Good schools, as well as jobs created by looser regulation and lower taxes, continue to draw new residents to Nashville, Tenn

Developers had 10,220 new units of multifamily housing in some phase of the development process in Nashville in the third quarter of 2018, according to CoStar. That works out to 8.7 percent of the current inventory.

MPF counts 5,329 new rental apartments under construction in the Nashville-Murfreesboro-Franklin metro area. That’s equal to 3.6 percent of the inventory across the broader metro area.

  1. Boston

Smaller cities in the Southern and Western U.S. dominate CoStar’s list of top markets for new development, but there are a few exceptions.

Developers had 17,707 new units of multifamily housing in some phase of the development process in Boston in the third quarter of 2018, according to CoStar. That works out to 8.6 percent of the current inventory.

But only a few of these planned apartments have actually broken ground. MPF counted far fewer new rental apartments under construction in the Boston metro area, equal to just 1.9 percent of the inventory across the broader metro area. The difference between MPF and CoStar shows how long it can take for a planned project to be approved by local officials and actually start construction.

  1. Jacksonville, Fla.

Jacksonville, Fla. is number five on CoStar’s list of top markets for new development.

Developers had 6,906 new units of multifamily housing in some phase of the development process in Jacksonville, Fla. in the third quarter of 2018, according to CoStar. That works out to 8.2 percent of the current inventory.

MPF counts 3,988 new rental apartments under construction in the Jacksonville metro area. That’s equal to 3.5 percent of the inventory across the broader metro area.

  1. Seattle

A booming tech economy has kept developers interested in building apartments in Seattle, perhaps too interested. “The volume of new supply has dampened rent growth,” says Greg Willett, chief economist with RealPage Inc., a provider of property management software and services.

Seattle is the only city on CoStar’s list of top cities for new development where rents fell over the year the ended in the third quarter on 2018. It is number five on CoStar’s list of top markets for new development.

Developers had 24,388 new units of multifamily housing in some phase of the development process in Seattle in the third quarter of 2018, according to CoStar. That works out to 7.7 percent of the current inventory.

MPF counts 15,986 new rental apartments under construction in the Seattle metro area. That’s equal to 4.8 percent of the inventory across the broader metro area, making it tie with Charlotte, N.C. for number three on MPF’s list of top markets for new construction.

  1. Denver

Education is the chief driver of the strong demand for new apartments in Denver, which is number seven on CoStar’s list of top markets for new development.

Developers had 16,699 new units of multifamily housing in some phase of the development process in Denver in the third quarter of 2018, according to CoStar. That works out to 7.1 percent of the current inventory.

MPF counts 12,624 new rental apartments under construction in the Denver-Aurora-Lakewood metro area. That’s equal to 4.4 percent of the inventory across the broader metro area, making it number seven on MPF’s list of top markets for new construction.

  1. East Bay, Calif.

Just across the Bay from San Francisco, developers are busy in towns like Oakland and Berkeley, Calif. The area is number eight on CoStar’s list of top markets for new development.

Developers had 11,632 new units of multifamily housing in some phase of the development process in the East Bay in the third quarter of 2018, according to CoStar. That works out to 7.0 percent of the current inventory.

MPF counts 6,936 new rental apartments under construction in the Oakland-Hayward-Berkeley metro area. That’s equal to 3.4 percent of the inventory across the metro area.

  1. Charlotte, N.C.

Charlotte is number nine on CoStar’s list of top markets for new development.

Developers had 11,065 new units of multifamily housing in some phase of the development process in Charlotte in the third quarter of 2018, according to CoStar. That works out to 6.8 percent of the current inventory.

MPF counts 8,634 new rental apartments under construction in the Charlotte-Concord-Gastonia metro area. That’s equal to 4.8 percent of the inventory across the broader metro area, making it tied with Seattle for number three on MPF’s list of top markets for new construction.

  1. Austin, Texas

Austin is number 10 on CoStar’s list of top markets for new development.

Developers had 13,991 new units of multifamily housing in some phase of the development process in Austin in the third quarter of 2018, according to CoStar. That works out to 6.7 percent of the current inventory.

MPF counts 10,282 new rental apartments under construction in the Austin-Round Rock metro area. That’s equal to 4.3 percent of the inventory across the broader metro area, making it number eight on MPF’s list of top markets for new construction.