If you’re wondering how much rent you should charge for property you own, you’re not alone. This is a decision millions of investors have to make annually, not just first time landlords.
In fact..
Mary B. sent us an email asking “As a new landlord, how do I determine what rent I should charge for my house I’ve now turned into a rental property? I don’t want the property sitting vacant for long but I also need to make as much possible to get a good return on my investment.”
So to get started, I’ve filmed a brief YouTube video laying out my thoughts and strategies for determining how much you should charge for rent when the property is ready to be leased again.
But a good rule to follow is total up all your annual expenses for operating the property and then add $300 on top of that amount. This is a rough estimate of how much rent you should charge at a minimum to cover all your expenses and still cash flow at least $300.
Click here to watch this video on YouTube instead
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Why Setting the Right Rental Price Is a Tough Decision
Every year since the 2011, rents have continually increased in most major cities. We know rents have risen and that we can charge more for our properties, but raising rents can be a scary decision.
On one side, we could make the tenant upset and they could leave without renewing their lease. This is okay if you believe another tenant will quickly fill the vacancy.
As of today, the rental market appears to be strong for the near future as housing prices have risen in most bigger markets.
Renting is still the more attractive option to most millennials and current renters since it’s cheaper in most cases for them to rent compared to buying a home.
On the other side, if you don’t raise your rents or you charge too low of rent for your house, then you’re hurting your return on investment and taking on higher risk of supporting all your expenses and still producing a positive cash flow.
But don’t worry…
As a landlord you can feel confident charging a higher rent initially since there is strong demand right now.
You’re likely to get someone who is willing to pay a higher rent this year than what you were charging previous years since supply is still low due to lack of new construction.
Resources:
- Real Estate Investing School: How to Retire on Passive Income
- How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
How to Know If Rent You Charge Is Too High?
If you receive very few phone calls, then the market is telling you your rent price is on the high side compared to other housing options they have out there to fill up first.
To avoid being too high or too low on the amount you charge for rent as a landlord, try the following tips I outline below that I use with my rental properties.
How I Determine What Rent to Charge for My Properties
In my experience, we’ve analyzed our rental market seeing what houses and apartments are renting for in different zip codes.
We separate one bedroom, two bedroom, three bedroom properties because rent varies based on bedrooms and square footage of the property usually.
From there we determine the average rent and set our rent higher if our property is in a better location or better condition.
If we get no phone calls after a few weeks, we drop the price until we start getting a decent volume of interest in renting our property.
You’re going to have to do some market research and maybe even visit a few rentals nearby as if you are a prospective tenant so you can see what competition you are facing.
You’ll get inside info on what units your tenants may also be looking at in addition to your property. This allows you to compare amenities and features your prospective renter is likely weighing in their decision making process.
What Determines a Rental Property’s Income Potential?
- The Features of Your Property
- The Rental Market
- The Location
- The Economy in Your Area
What Rent Can You Charge Per Month?
For starters, you have to know what the rental market in your area is up to before you purchase an investment property.
- Are rents currently rising or falling?
- Which neighborhoods are being sought after most and thus seeing increasing rents each year?
- Which school districts are being sought after most?
By knowing this information you can evaluate if your property or potential property is in a good location and will allow you to charge higher rents than other parts of town.
It also may mean your property will appreciate in value over the years if it is in a prime and highly sought after location.
If you discover that your potential investment is in a not so desirable location, it will be easy to say no to the deal and instead accept another deal in a better location. Location is everything in real estate.
Is the Economy Strong Enough to Support Raising Rents Annually?
Next you need to know what the economy is up to.
Are there new developments being built and new companies bringing their franchises into your town?
When the local business district is growing, there will usually be an increase in population coming into your area as people move to get a job and fill the newly created jobs.
With an increase in population, there is an increased need for housing to house the employees which means as a landlord you’ll have a large pool of potential applicants trying to rent your property if it is located near their place of employment.
Resource: Real Estate Investing School – Start Lesson 01
The increase in demand for a limited supply of housing will also cause rent prices to rise in response as well as new construction to build additional housing and apartments.
So it’s a good thing when your city experiences business growth because that means your investment property will have less vacancies due to increased pool of tenant applicants trying to find housing.
And you’ll be able to increase rents each year as long as the demand is there and the supply/new builds haven’t caught up and flooded the market yet.
Development projects usually take a while so the rental market should be strong for a while during growth periods allowing you to raise rents year to year.
Where To Find Property with Strong Rent Potential
Now that you’ve analyzed what the rental market is doing, what the economy is doing, and what locations are desirable, you can search for investment properties in good locations in your town.
These are locations that will be supported by the school district, employment opportunity, and allow you to get solid rents and hopefully low vacancy over the life of your investment.
You may also get icing on the cake, appreciation, if lots of home buyers are coming into your neighborhood driving up home prices in order to get real estate in that location/neighborhood.
What Are the Features That Tenants Will Pay More Rent For
The features of your property will be the most important thing a tenant looks at to decide if the rent you’re asking is justified. Features are important to look at when you are starting out and determining a rental price to charge to begin with.
Then the economy and rental market we discussed above will affect future years and whether or not you can raise rents to grow your income.
Consider the following checklist of possible rental property features:
- How many bedrooms?
- How many bathrooms
- How many square footage is the home?
- Is it a one story, two story, etc?
- Is the garage attached or detached?
- What type of home is it? Bungalow, Colonial, Cape Cod, etc?
The more rooms a home has, the more rent you’ll be able to charge usually. Same goes for size of home.
A home with more square footage will likely cost more than a similar home with less square footage, hence allowing you to charge more in rent as well sense rented space differs between larger and smaller properties.
Location is another factor that dictates how much rent you can charge. Premium locations will allow you to demand higher rents.
Once you know the features of your home you can get comparable rents from nearby properties that have similar features.
If you have a 4 bed and 1.5 bathroom home that is 1,700 square feet, then you’ll want to look for nearby homes that are for rent that are also 4 bed, 1.5 bath, and around 1,700 square feet.
Resource: Real Estate Investing School – Start Lesson 01
How do you research rents of similar properties?
Call around to local for rent signs you see
Pretend to be a tenant gathering information about a property you want to rent and ask the landlord different questions such as how much rent is, how many beds and baths, do they allow pets or smoking, and any additional features of the property.
Try to find properties close by to yours, maybe down the road or on nearby streets that are for rent because these will be your competitors and you’ll get a feel for how they’re pricing their asset.
Use Zillow.com
You can go onto Zillow and look up not only properties for sale but also properties for rent. I’ve created a tutorial video on how to use Zillow that you can watch.
How to Use Zillow to Analyze Properties for Rent
Zillow allows you to set criteria to narrow your search results, so you’ll want to enter the number of bedrooms and bathrooms and square footage of your property for starters, and then you can decide how narrow you want your search to get.
I’d start with just those 3 criteria and then zoom in on the map to the area around your property to see if there are any houses that show up nearby that are for rent.
Whatever they are renting for can give you an idea of what yours may rent for. You can then call to see if there are any features differentiating their property from yours that would allow you to charge more or less.
List your property for rent and then get a feel based on number of applicants
This will be the most realistic way to determine what your property can rent for but the first two steps will help give you a ball park price to start your listing at.
Once you’ve listed your property for rent, gauge how many calls you get.
If you’re flooded with phone calls of interested applicants, you may be charging too low of rent and if you’re phone is silent you may be overpriced.
Let the market tell you based on the activity your listing gets.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
Don’t Forget Rental Property Vacancy Expenses
Once you’ve determined the rent that you can charge per month for your rental property, you can multiply it by 12 to get the annual rent.
Vacancies are what we will wrap up this discussion with though.
When you own an investment property, you have to account for vacancy.
Beginning investors will be overly optimistic and think that their investments will never sit vacant. Therefore, they’ll plug in a full 12 months rental income on the pro forma when projecting out their net income.
I always run 3 different pro forma spreadsheets when analyzing an investment.
I create an optimistic pro forma where I use 0% for vacancy. Then I create a realistic pro forma where I include 1 to 2 months of vacancy expense.
Finally, the third pro forma is a worst-case/conservative approach where I use 50% vacancy rate, assuming the single family home will sit empty for 6 months.
This allows you to get 3 different cash flow projections based on how the economy/rental market may go.
Assume the optimistic casewhere demand is hot and there are no vacancies as everyone is trying to find a place to rent at an affordable price. This will allow you to input higher rent growth projections into your spreadsheet.
Assume the realistic modelnext which accounts for a stable market in which rent prices are moderately growing and you may have occasional vacancy depending on the economy.
Finally, assume the conservative modelwhere housing supply is greater than tenant demand for rented space to live. This will lead to negative or zero growth in rents as landlords compete for limited tenants to avoid having vacant properties.
This may be a time in the economy where people are unemployed, such as recession, and can’t afford the rents your area is charging. This limits the pool of applicants available and causes long vacancy periods unless the landlord lowers the rent.
Don’t Worry, You Got This
Overall, spend a week analyzing your market and it will be pretty clear what rents you can charge for your property. A new resource we use to help investors we work with is Rentometer.com which has a free version and a pro version you pay a fee for.
It can quickly analyze all the properties within a certain radius of your home that have been rented in the past 3, 6, or 12 months so you can get averages.
Thanks so much for being here today to consume my content and giving me time out of your day.
If you have a few extra minutes to spare, I’ve linked to some additional articles I think you’ll find valuable as well as my real estate investing course that has been getting great reviews from hundreds of students.
Additional Articles to Read:
- How to Buy Your First Rental Property as a Rookie Landlord
- Building Passive Income from Rental Properties to Retire Early
- Ultimate Guide to Creating a Real Estate Business Plan
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