So now that you have an investment property or two under your belt, you are probably considering the possibility of renting them out. However, determining the right property rent rates can be difficult at times. Not sure how much to charge for rent? You’re not alone.
After all, if you charge too much, you’ll likely have higher vacancy rates—but if you undercharge, you’ll lose out on profit.
Here’s how to check if your rental unit is priced correctly.
Purchasing your first rental property is just the beginning of your real estate journey, because being a good landlord is almost as important as making good deals. BiggerPockets’ free guide How to Become a Landlord: Managing Rental Properties for Real Estate Investors will teach you everything—from setting rent to handling evictions.
First: What Is Market Rent?
The term “market rent” refers to the current average rent price for nearby rental property. Remember, rent is determined by the real estate market value. So when determining how much to charge for rent, what other landlords are charging is valuable information.
However, keep in mind additional variables that can affect your rent, such as:
- The number of bedrooms and bathrooms
- Any special amenities
- Square footage
- Single-family homes vs. apartments or condos
- Garage or storage space available to tenants
- Pet policies
Prospective tenants may place more value on certain amenities, like pet-friendliness. That might mean higher rents. Just pay careful attention to your return on investment—and your boundaries.
Read More: The Ultimate Guide to Fair Market Rents
Calculating Market Rent Prices
In addition to browsing local rental listings, we recommend signing up for Rentometer, which costs about $100 per year. This website allows you to compare monthly rents for similar properties by city or zip code. It gives you the 75th and 90th percentile, so you can estimate the highest applicable rent and the lowest rent. Most likely, your property is going to fall somewhere in the 90th percentile.
This is a great place to start, so use it as a baseline. Don’t blindly rely on the data provided on Rentometer though, because you don’t know what those properties look like. Pairing this with your own research is the best strategy. For example, go on Apartments.com or Zillow and find nearby properties that resemble yours. Pay attention to the year built, the number of units, amenities, convenience, interior and exterior finishes, and inclusion or exclusion of a washer and dryer. It’s unlikely that you’ll find an exact match, but this is still enough to get a good estimate on the rent.
You can also go low-tech—simply drive around your neighborhood. If you pass any properties up for rent, call their owners and ask how much they are charging. This will give you a rough indication of how much you should be charging.
These methods will help you understand the viability of different rental rates.
Know How Occupancy Rates Affect Rental Price
What’s the average occupancy rate in the area? Is it 95 percent or 85 percent? How’s your property’s occupancy rate compared to the region’s? You don’t want it to be higher or lower by too much.
If your occupancy rate is much higher than the regional average, then your rent is probably not aggressive enough. If it’s a lot lower, then your rent might be too high—or you might have a much bigger issue than just pricing.
Check In With Your Property Manager
Property managers are great resources, but don’t rely on them completely. Ask them about the current market rents and for a market report to determine how much to charge for rent.
For the report, your property management company can give you a list of comparable properties with the current rents, which you can then verify yourself—either by researching online or visiting the properties in person. They can also advise you on what amenities might increase your rent. For example, if your property lacks a dishwasher, adding one might be an easy way to raise rents by $50 per month. Of course, you should carefully calculate your potential return on investment before making any major changes.
If you don’t have a property manager, real estate agents can also help you assess the local rental market.
Don’t Skip the Site Visit
Once you’ve found a couple similar nearby properties, call or visit the property as a potential renter. Ask questions regarding the current rent, unit size, amenities, utility bill, and any special features. Preferably, you should visit the site to get a good feeling of the property overall.
Go through these steps at least once or twice a year for each of your properties. Studying the current local market increases your rental income, helps you properly manage your current properties, and ensures you make better acquisitions in the future.
All that information is helpful, but serious investors need to dig deeper to know exactly how much to charge for rent. Follow these rules to arrive at the perfect price.
1. Minimum rent requirement
The rent has to be high enough for you to be able to afford expenses and provide cash flow.
Let’s assume your expense ratio is 50 percent, covering both the economic losses and the operating expense. Thus, in the case of a $500 rental, a 50 percent expense ratio would leave us with $250 to cover three very important things:
You’ll likely find that $250 is simply not enough to cover all three of the above. And since debt service is mandatory, the choice we face is between our profit and CapEx reserve. What we often see is landlords pocketing the money left over after debt service, then getting excited about their great cash flow. But eventually, something will happen—maybe their house gets trashed and they need to replace the flooring, water heater, and stove.
What they suddenly experience is that tragic feeling in the pit of their stomachs which accompanies cash flow in reverse. All of the money they thought they’d made suddenly transfers from their account to their contractor‘s.
This is what happens when one has to make a choice between CapEx reserves and cash flow. That’s why you need a minimum rent. There’s no hard-and-fast rule, but for apartment settings, this is often around $650—and likely more like $750. For single-family rentals, this minimum rent requirement is much higher.
2. Maximum rent requirement
We are always looking to fulfill two objectives: to both protect and grow our investment. Just like there is a minimum requirement for rent, there is also a maximum. We have to be able to appeal to the widest cross-section of the potential audience. If you buy rentals that are too high within the scope of your market, this becomes difficult.
Shoot for rentals between the 55th and 70th percentile of market rents. This appeals to stable, reliable tenants but isn’t so exclusive that only a tiny sliver of the marketplace can qualify.
3. Focus on price per square foot
In order to truly compare apples to apples, you have to price your rentals on a per-square-foot basis. Let’s say you purchase an apartment building currently renting one-bedrooms for $525, and online research indicates the market could withstand a $150 rent increase.
But how big are those comps? If they’re 850 square feet, and your rentals are 600 square feet, that market research is no longer relevant—even if they’re both one-bedrooms. Can you convince people, for example, to pay even $625 if units that are 250 square feet larger are available for $700? Unlikely.
With the above information, you should now be well equipped to set an appropriate rent price for your investment properties.
Source; By Jay ChangJay, a civil engineering graduate from UCLA, is an active investor, developer, and writer.