How Rent Prices Are Determined

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No matter how good a deal you have on your rent, eventually you’ll hear about someone who has it better. And then just when you start to feel bad for yourself, you’ll meet someone who’s paying an arm and a leg for a place much smaller than yours. When you think about the wide range of rents in your city, you’ll start to wonder –- how do landlords figure out how much to charge?

Unless an apartment is rent-controlled or rent-stabilized, a landlord needs to set rental rates high enough to cover the apartment’s expenses. And there are a lot of expenses. Many landlords have mortgages on the properties they rent out. If the building employs a Super, building rents must cover the salary. Supers who live in the building often receive free or deeply discounted rent — another cost. Add building repairs, utility bills, taxes, common area amenities, and insurance, and you’ll see a significant amount of money that the landlord needs just to break even. But we all know that most landlords aren’t just breaking even. Once the basic costs are covered, landlords need to figure out the greatest amount of rent they can charge and still ensure that tenants are willing to rent the apartment.

This magic number is essentially the market rate, and it’s always changing. Landlords stay on top of the market rate in many of the same ways tenants do. We spoke to landlords of both large and small buildings who admitted to doing regular research about what others were charging by looking at newspaper rental listings, checking internet ads, and calling real-estate agents. But this research is only useful if it’s targeted. Landlords focus their searches to apartment buildings in the same neighborhood, with the same number of bedrooms, similar square footage and amenities. If you think this sounds like a lot of work, you’re right. It’s complicated enough for someone to have designed software to help landlords with rent calculations. This is one reason that landlords with smaller properties don’t always do as much thorough research as landlords of larger buildings. Michael, a landlord with four units in his Brooklyn brownstone says that it’s not worth his time to follow the latest rental trends in his neighborhood. “I have a real job. It’s just not worth it to figure out whether I can charge my tenants a little bit more.”

Landlords with more units are less likely to have day jobs, often making their living exclusively from the rental market. For these landlords, it makes sense to follow market trends more carefully. Marla and her husband own several five- and six-story walk-ups in New York’s trendy East Village neighborhood, each with 20 to 30 units. She says that the most important factor determining her rental rate is location. “I’m lucky enough to own buildings in a neighborhood where everyone wants to live. My tenants are less concerned with whether they have a dishwasher than how close they are to the subway.” Even having a building in a desirable neighborhood won’t allow her to charge whatever she wants; she admits to closely watching what nearby walk-up buildings are charging and making sure that her rent stays in the same range.

Landlords with many units have an advantage over smaller building owners — they can use newly vacant apartments as test sites to see how well a rent hike will be received by potential tenants. If most of the two bedrooms in a complex rent for $1800 a month, the landlord can test how well a rent hike to $1950 will be received by setting that price for a vacant unit and seeing whether there is any difficulty filling it. If the apartment is easily filled, the other two-bedroom tenants may see a similar increase at the end of their leases. On the other hand, if the $1950 monthly rent scares off prospective tenants, the landlord knows to try for a smaller increase next time. To a tenant, it may seem that the landlord takes every opportunity he can to raise the rent. To Marla, though, it’s sound business practice. “People seem to forget that our expenses go up too. I also have a lot of rent-stabilized units and it’s harder to cover my costs with those.”

Rent-controlled and rent-stabilized apartments are more precious than gold to thrifty tenants. They can be hard to find, so people go to great lengths not to give them up. Rent control and rent stabilization are government initiatives designed to maintain affordable housing, with laws that vary depending on the state. Rent stabilization and control laws generally affect older apartment buildings and the tenants who occupied them at the time these laws were passed. These laws are one of the reasons that tenants may be paying wildly different amounts for the exact same apartment in the same building. Rent control applies to the leases of particular tenants while rent stabilization applies to particular apartments, regardless of who occupies them. A rent-controlled apartment is essentially impossible to obtain because the rent-controlled status has been grandfathered into a lease held by the particular tenant. These tenants have usually been in their apartments for a considerable amount of time. When they finally terminate their leases, the apartment rent usually returns to market value.

New tenants can actually obtain rent-stabilized apartments. Tenants in rent-stabilized apartments are protected against rent hikes of more than a certain percentage each year. Even when a rent-stabilized tenant ends his lease, the landlord still has to abide by rent stabilization laws and limit the amount the rent can be increased for new tenants. However, rent stabilization typically expires after the total apartment rent reaches a certain threshold (you can check your state or city laws for the rent stabilization threshold where you live.) In both rent-stabilized and controlled apartments however, tenants pay less than they would in a market rate apartment.

When the landlord decides to re-tile the lobby, fix the front stoop, or install a new sprinkler system, new tenants pay disproportionately more than the old tenants who have stabilized or controlled rents. Landlords of older buildings count on the rents of newer tenants (and regular increases in their rents) to help cover costs for the entire building. Of course, the rent calculations that many landlords perform are not an exact science. The fact that landlords set their rents in a range rather than to an exact number tells tenants that there may be more room for rent negotiation than we think.

12 Responses to “How Rent Prices Are Determined”

  1. August 29, 2007 at 12:55 am, Guest said:

    What are your thoughts on market rent for a brand new apartment complex that is under construction and leasing out apartments as they are ready for move in?

    Reply

  2. September 03, 2007 at 2:44 pm, Anonymous said:

    I moved into my apartment 8 months ago, at which time I was told many improvemnts were going to be done, some have. However more havent. Needless to say I am not very happy. While searing the internet I found my apartmnet complex advertising my same model match unit for $275 less a month. Any suggestions?

    Reply

  3. September 11, 2007 at 7:39 pm, Guest said:

    Note that the same floor plan may rent for different amounts in the same complex at the same time. Factors that cause this can include:
    Condition (such as of carpet)
    Recent upgrades (such as recently replaced appliances)
    Location (1st vs. 3rd floor, view, proximity to assigned parking).
    This can make it difficult to compare units even within the same complex because floor plan alone isn’t the whole story.

    Also, some “location” features are even desirable to some tenants and undesirable to others so it’s hard to know which is in more demand which makes it even harder to compare (for example, some people prefer the easy access of a ground floor unit while others prefer the privacy of upper floor).

    Reply

  4. September 14, 2007 at 7:51 pm, Guest said:

    —- on the carpet, — in the toilets and don’t flush it, and then move out. I left a couple turds in the sink, bathtub, and fridge when I moved out. That’s what they get for upping my rent $200/mo two years in a row.

    Reply

  5. September 22, 2007 at 5:35 pm, Guest said:

    I believe that this would just cost you more in the end. Besides, it’s disgusting and normal people wouldn’t do it.

    Reply

  6. September 23, 2007 at 9:08 pm, Guest said:

    Being in the business for 12 years, I can tell how new communities usually do business. They set their rents at a certain rate and then they set a scale that after a certain number of leases, they raise rents. It’s usually every 10-15 leases they raise rents by about $15-$20. They do this until they reach occupancy of about 90% or better or until they get the rents so high that the market cannot handle the rates. So, this means that the 1st tenants are paying less than the recent tenants who have moved in. It’s kind of like saying THANKS for giving us a try before anyone else does.

    Reply

  7. September 25, 2007 at 11:39 am, Guest said:

    Recently moved in to a new apartment complex 2 bedroom, and now recently been told my rent is going up $100.00. My neighbor who is next door same plan and first time renting of unit like myself did not get an increase. My apartment is in the condition when I moved in and hers is smoke residents. How could they raise my rent and not hers. As well as 3 others in my unit had no increase. All they could say is that corporate office gives them a list and tells them how much to increase per apartment number. Not a good answer. What type of questions should I had asked?

    Reply

  8. October 23, 2007 at 10:18 am, Guest said:

    I AM THINKING OF RENTING MY PRESENT HOME SO THAT I CAN MOVE FOR THE LAST TIME INTO A NEWER HOME,THIS HOUSE IN TOPEKA,KANSAS IS 4BEDROOM, 2BATH, WITH A PARTIALLY FINISHED BASEMENT WITH WASHER/DRYER HOOKUPS AND CABLE HOOKUPS AND A TWO CAR GARAGE, WHAT SHOULD I RENT IT FOR?

    Reply

  9. December 18, 2007 at 7:53 am, Guest said:

    you are no help to me
    go kill yourself

    Reply

  10. January 08, 2008 at 2:20 pm, Guest said:

    gayyyyyy

    Reply

  11. July 10, 2008 at 7:54 pm, Guest said:

    My landlord had flaws…leaky roof and faulty electric wiring hidden when I agreed to the rent. Now I have paid what he asked for 2 years and this apartment has not been worth what I pay. I think there needs to be legislation that requires a landlord to keep the apartment in the same condition it is rented in…not including tenant damages of course but if the roof leaked and he knew it…this is wrong and a rip off. If you buy a pair of defective jeans, Walmart takes them back and you get your money back…this should work for renting too…any suggestions on how to propose this to a State Rep.???

    Reply

  12. December 14, 2016 at 6:45 pm, Sheila said:

    Since 1999 the rents in L.A. have skyrocketed. All of the people who gambled away their money on the stock market thought they could recoup their losses by doubling and trebling rents on their properties. There should be an independent board that evaluates rental units and the owner should not be allowed to charge more. Also, when a renter goes to see a place that BOARD should present them with a list of everything wrong with the place.

    Reply

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