Choosing an appropriate rent rate is a multifaceted decision.
On one hand, you need a certain minimum rental income to cover your expenses and run your rental business. Without this minimum, you can’t continue to support your properties.
On the other hand, an unusually high rate will deter applicants and may lead to long-term vacancies.
So how do you know which rate is just right?
When setting your rent rate, it’s important to consider several factors in your calculation. Local rates and comparable properties matter, but so does the property age, condition, location, amenities, and general housing trends in the area.
Here are the basics of rent pricing for landlords.
Calculating a Baseline
Before you dive into research, try to determine a baseline or minimum rate for your rental that you can adjust later.
There are several methods for calculating this baseline. You might start by adding up your monthly expenses (maintenance costs, landlord insurance, property management fees, etc.) to determine the cost of operating your rental each month. This amount is the minimum amount of monthly rental income you must collect for your rental to be profitable.
Another method is to use the 1% rule. According to this rule, you should charge at least 1% of the purchase price of the property for monthly rent. Properties that pass the 1% rule are likely to cash flow; however, remember that other factors like monthly expenses and property condition also matter.
Lastly, you can calculate a rent to value ratio. A rent to value ratio is the monthly rent rate divided by the purchase price. A higher ratio means more cash flow and a better rate for your original investment.
Each of these three methods can help you determine a baseline rate for your property. However, they are only general rules of thumb and shouldn’t be considered in isolation.
Researching the Market
After establishing a baseline, it’s time to perform some market research to fill out the picture of rental rates in your area.
Your first step might be to find the average rent price. But remember that an average represents all the types of units, including upscale properties that could bias the rate. A median rate won’t be as skewed by unusually high or low rates.
The best way to go about researching is to find comparable properties in the location of your property. Look for properties with similar square footage, age, and condition. Compare the rates of these properties and consider whether you offer any more or less amenities.
It’s also important to consider rent trends over time. Ask around or research to find out how rent has trended the past few years—have rates continuously increased? Decreased? Stayed the same?
Rent rates tend to vary over the years, but noticing any broad trends will help you further narrow down a rate appropriate to the unit and the community.
Considering Other Factors
There are a variety of other factors that might influence your decision when setting a rent rate.
For instance, location is key. Is your property located near a good school district, walking distance from major tourist sites, or close to the beach? If so, nearby rates will likely be impacted, and you can charge more for these conveniences.
Your property’s age and condition also matter. Renters will almost always pay more for a newly renovated unit than an older one with the same size and amenities.
Pricing your rental can be a complex decision. In addition to considering the particularities of your unit, you also must consider the trends and patterns of your city and town. But by carefully studying each characteristic and factoring it into your calculation, you can land on a rate that will lead to stable rental revenue and filled units.