One of the easiest ways to increase revenue at an apartment property is to charge more for the units that offer more.
Better view?
Charge more.
Third floor instead of second?
Probably worth a premium.
Cathedral ceiling instead of a flat ceiling?
Worth a little extra.
Active dormer instead of a conventional ceiling?
Maybe tenants will pay for that too but the ice is getting thinner.
Private staircase instead of a shared staircase in a townhouse?
Add another premium.
End unit instead of a center unit?
There’s another one.
None of this is necessarily wrong.
In fact, properly pricing differences between otherwise similar apartments is one of the easiest ways to increase revenue without increasing expenses.
But there’s a trap.
You can keep identifying desirable characteristics.
And keep attaching premiums to them.
Until eventually you’ve created a beautifully priced apartment that nobody wants to rent.
Suppose two essentially identical apartments have a base rent of $1,800.
One has a better view. Add $50.
It’s an end unit. Another $50.
It’s on the preferred floor. Another $40.
It has a cathedral ceiling. Add $50.
It has a private staircase. Another $20.
Individually, every adjustment might be perfectly defensible.
Collectively, you’ve just turned an $1,800 apartment into a $2,050 apartment.
Now the prospect isn’t necessarily comparing your $2,050 apartment to the $1,800 apartment down the hall.
They’re comparing it to every other apartment they can rent for $2,050.
That’s where hyper-segmentation can get you into trouble.
The Market Doesn’t Care About Your Spreadsheet
We can spend hours determining what we think each feature is worth.
Ultimately, it doesn’t matter.
The customer decides.
If apartments with cathedral ceilings consistently lease faster at a $50 premium, the marketplace has given you useful information.
Try $75.
If they continue leasing, maybe you were underpriced.
But if your end units sit vacant while less expensive center units disappear, the marketplace is telling you something else.
Maybe tenants like the end unit.
They just don’t like it $100 more.
That’s an important distinction.
An amenity can have value without having as much value as the owner assigns to it.
Watch the Total Rent
Apartment investors naturally focus on individual premiums.
I think it’s equally important to watch the total rent those premiums create.
At some point, the accumulated price differences can move a unit into an entirely different competitive set.
The renter who will pay $50 more for a view might also pay $50 more for a cathedral ceiling.
But that doesn’t necessarily mean they’ll pay $100 more to get both.
Pricing isn’t always additive.
And this becomes even more important as apartment operators gain access to increasingly sophisticated revenue-management tools. More data makes it possible to segment units more precisely than ever.
That doesn’t mean we always should.
The goal isn’t to develop the most sophisticated pricing model.
The goal is to rent apartments at the highest sustainable rent the market will accept.
So identify the differences.
Test the premiums.
Watch leasing velocity.
Listen to prospects.
And when the market tells you that an amenity isn’t worth what you’re charging for it, believe the market.
Reality Face Punch:
You determine what an amenity is worth on your rent sheet. Your customer determines what it’s worth in reality.