“It’s all relative…”
Relative pricing refers to the difference between prices of various apartments in your BTR building. Examples might be:
- North versus South Facing
- Higher levels vs lower levels
- Furnished vs unfurnished
- Balcony vs no balcony
- Parking vs no parking
You know you have a relative pricing problem when some apartments, or some apartment types, are consistently harder to rent than others. Monitoring your vacancy rates and new tenants per vacant unit rates can help identify a problem.
Tables 1 and 2 both tell a similar story: There are large disparities across the tables. Clearly the north facing furnished apartments are being priced too high, while the unfurnished apartments are being priced too low. The tweaks required for other apartments are more subtle, however should not be overlooked.
Now, let’s look at an example…
Suppose you have 50 North facing apartments and 50 South facing apartments. The market is prepared to pay 10% more for a North facing apartment versus South facing. However, you are charging only 5% more. So, what happens?
- After a few months, you find that all the North facing apartments have been leased because most tenants are happy to pay only 5% extra for a brighter outlook. However, you still have 20 vacant South facing apartments. You could have earned more by charging a higher premium for the North facing apartments. Those willing to pay the higher rent for the North facing apartment would have done so.
- Some tenants would have found the extra 5% a bridge too far, and would have chosen the South facing apartment. That’s OK, because it frees up more North facing apartments for those who are prepared to pay for them. Unfortunately, you are now in a situation that you have nothing to offer to prospective tenants who only want a North facing apartment. In the meantime, the South facing apartments remain vacant.
It would be straight forward to calculate and adjust this premium over time if the attributes were one dimensional. For example, if we only had to choose between North and South facing apartments. It becomes more challenging when we have multi-dimensional attributes.
For example, we might find that: Furnished 1 bedroom apartments can charge a premium of 20% versus unfurnished apartments, whereas furnished 2 bedroom apartments can only command a premium of 5%. This becomes even more challenging when we overlay the aspect, furnishing, bedrooms, balconies etc on top of each other.
As a result, getting the relativities right across the building can be a complex exercise, especially when there is a large number of dimensions.
