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Whether you’re a first-time landlord ready to test out the rental market or a more experienced landlord trying new locations and property types, deciding how much rent to charge can be one of the hardest parts of the rental process. And one of the most important.
The amount that you charge for rent will decide your profit, your vacancy periods, your tenant quality, and so much more. Careless landlords will look at nearby properties, pick a number, and keep moving.
But to make the biggest profits and get the best tenants, you know that you need to do more than that to determine rental prices for your properties.
All-in-all, there are five main factors to research, compare, and consider when you are putting a value on your properties. Today, we’ll instruct you about each of those factors so that you can be more informed the next time you calculate rent.
Table of Contents for How to Determine Rental Price
- Before Your Decide How Much Rent to Charge
- Major Factors for Calculating Rental Rate
- Follow Your Instincts
We know that you want to learn how to accurately calculate the rental rate as soon as possible, but there are a few things that you should consider and remember before you set out to do your research and calculations.
After all, you need to know more than just the rate – you need to understand why that rate works! For that reason, it’s best if you do not simply go around asking friends, “How much can I rent my home for?”
Sitting down and accurately learning rent calculation best practices will help you to be a better landlord and property investor as you will begin to know your property and its values more accurately.
Finally, remember to check for any rent control laws in your local area. If your property is subject to these laws, the amount that you can charge may be regulated. It’s best to look this up before you do any other steps to ensure that you do not waste your time!
Now, let’s get into best practices for how to calculate the rental rate! Whether you have one or a dozen properties that you need to price, using the following major factors to analyze your property will help you set a rental rate.
Work through the following characteristics of your property to set the right price for your property’s market.
1. Property Worth
Often, you can use your overall property worth to get a base rent value. This is an especially useful method for those that are renting out their former residence as you should be familiar with the true value of your home.
The rent of a property is typically between 0.8% and 1.1% of the value of the home. If your home is valued at $300,000, then, the rent could be somewhere between $2,400 and $3,300 a month.
This method, of course, will be affected by the actual price range of your property. If the property’s value is under $100,000, most markets can sustain you charging around 1% of the home’s value for rent.
If, however, your property’s value is $375,000 or more, you will likely want to stick to the lower side of the range to attract better tenants. Charging too much could scare away good tenants, and you will want to focus on renting to only the best tenants.
2. Local Rent
One of the things that most landlords do when trying to decide what to charge for rent is to check out what other landlords in the area are charging. There is, however, one common mistake that is made when using this technique.
When you compare rent between properties in your area, you need to ensure that you are comparing similar properties. If you are renting out a studio apartment, you will not be able to compare the rental cost to a single-family home’s price point.
Finding the balance of how much to charge for rent is easier when you are checking out properties with similar characteristics in the following areas:
- Lot size
- Number of bedrooms
- Number of bathrooms
- Year built
- Year most recent remodeled
- Included amenities
If you charge too much more than local properties with similar characteristics to your property, you will be hard-pressed to find a high-quality tenant for your property. On the flip side, you want to make sure that you aren’t shorting yourself on profits by charging too little. Analyzing the local market can help you find the right balance of value for tenants and profits for your business.
Once you’ve found comparable properties and determined a range of prices that might be appropriate for your property, reach out to three local real estate agents or property managers. Ask them if they could consider your price to be reasonable or not. Thanks to their experience in the local market, they will have a good idea of what works and what doesn’t work.
3. Consider Demand
Despite the information that you gather from #1 and #2 above, the rental value of your property could change drastically due to demand.
Demand can affect the rental cost of your property in both positive and negative ways. These are some of the most common effects of demand that you are likely to see:
- During a bad economy: demand for rentals goes up as fewer people can afford to buy
- During a bad economy: smaller, cheaper apartments will go more quickly
- Before the school year: larger-sized properties are more in-demand as families try to move before the school year changes
So, how do these changes in demand affect what you can charge to rent out your property?
Generally speaking, the less demand there is, the lower you must make your rent to bring tenants in. When demand is high for the type of unit that you are offering, you can set the rent at a higher price.
4. Cover Your Expenses
Often, new landlords use only #1 through #3 above to decide how much rent to charge. While those factors give a decent idea of what you can expect to get out of a rental property, they are missing a key calculation factor that can seriously affect your bottom line.
Those numbers do not take into account the expenses that you as a landlord are incurring.
There are a few factors that can affect how much money you will make from a property:
- Mortgage payments (if applicable)
- Maintenance costs
- HOA fees
- Cost of vacancy periods
- Property management costs
In addition to those expenses, you want to make sure you can actually make some profit each month, too! A profit of between zero and six percent of the rent should be set aside as profits each month as well.
Once you’ve calculated the potential rent according to local property values, your property value, and the current demand, calculate how much of that money will need to go towards expenses every month. If you are left in the negative or with no profits, you will want to consider a slight increase in the rent to ensure you turn a profit each month.
5. Rent-Boosting Features
We briefly mentioned how the amenities available at your property can affect the rental value, but it’s important to understand which amenities are big rental price boosters. These amenities are much larger in value and would typically cost a lot to acquire for each month, so they can afford between a 3 and 15% increase to rent.
Such amenities include:
- Swimming pools
- On-site parking
- Washer and Dryer
On the flip side, adding additional amenities can create additional maintenance issues. It’s important to get appliances well rated for renters. Some landlords will refuse to install items such as a garbage disposal because of the additional maintenance issues they create.
Paying attention to the effect of these amenities is especially important whenever you cannot find any properties that have the exact amenities that yours does. Be sure to be aware of this difference and price property accordingly.
Now that you have the tools to get started on discovering appropriate rental prices in your area, you will never be left wondering, “How much should I charge for rent?”
Instead, your instincts and awareness of the most important factors that affect rent will be sharpened. Remember, pay attention to:
- Local, comparable property prices
- The property’s overall value
- Current market demand
- Your expenses
- Bonus on-site amenities
By using your growing instinct for the value of each of these characteristics, you’ll be on your way to setting the perfect bottom-line-boosting rental rate every single time. And that will revolutionize your business!