How to Charge the Right Rent
Knowing how to charge the right rent is key step to any owner renting out their property. Here are some tips for landing on the right monthly number.
You’ve bought the rental investment property, you’ve fixed it up, you’re ready to rent it—almost. Before you place that listing, you need to figure out what to charge for rent. You know you don’t want to underprice it and miss out on revenue. You also know you don’t want to overprice it and have it sit empty. Here’s how to hit that sweet spot and charge the right rent for your rental investment property.
Set yourself up for success
Many investors want to make 1% or 2% of the purchase price back in rent. So under the 1% rule, an investor who paid $200,000 for a property would be looking to make $2,000 a month in rent. Under the 2% rule, they’d be aiming for $4,000. Rules like these can be helpful when making a purchase to gauge profitability. Be sure to run these numbers before buying a rental investment property. But what determines rental price is a balance of the current real estate market, the local economy, and the size and condition of the rental itself.
Compare, compare, compare
Real estate market: Hot or not? Much like pricing a home to sell, setting a monthly rent has a lot to do with the state of the real estate market and your local economy. In a real estate market where there are a lot of potential renters and few open rentals, you may be able to price your rental at the top of the market and be more choosy about tenants.
Research those comps. You’ll want to look online at what similar places nearby are renting for. Be sure you’re comparing the proverbial apples to apples. Don’t directly compare a place that’s got three bedrooms and two bathrooms with one that’s got two bedrooms and only one bathroom. If you’re using a property manager, that person will prepare a list for you and suggest a monthly rent based on their expertise.
Use online comparison tools. If you’re acting as your own property manager, you can gather data from rental comparison tools. Zillow offers a rental calculator that provides estimated rent on an address. It also provides a list of nearby comparables with data such as address, how long it’s been listed, number of bedrooms and bathrooms, and extras including in-unit laundry and parking info. Rentometer offers an analysis on rent by address, and a paid account gets you more detailed reports. My Rent Rates offers a similar analysis and breaks down what rental income is needed to afford the rent.
Assess the specifics of your rental against the competition.
- Location. Yep, location is a top factor in determining how to price your rental. A desirable location means you can push to the top of your comparables, while a less desirable one will put you at the bottom. Depending on your locale, a sought-after location might mean walkability to neighborhood shops and cafes. Or it might mean easy access to a highway, business district, or local college. Properties on quiet streets near a park might rent for more than those on busy streets. A family-friendly rental in a well-regarded school district will likely rent for more.
- Condition. A newly remodeled home with modern appliances can charge a premium, while a place with a kitchen right out of the 80s might be at the bottom of the comparison heap. Hardwood floors win over outdated carpet. While curb appeal might not matter quite as much in a sale, most renters still want a nice-looking home.
- Amenities or Extras. If your property has off-street parking while many in the area don’t, that could be a plus. If you’re renting a small condo, an in-unit washer/dryer might attract tenants willing to pay a bit more. Is there central AC in an area where window units are common? A pleasant outdoor space might put your rental above another otherwise similar unit, too.
- Crime Rates and Safety Measures. You’ll also need to assess the nearby crime rates. Do cars frequently get vandalized? Are break-ins common? If so, adding security measures like deadbolts or video doorbells may help attract renters and benefit your rental bottom line.
Once you’ve found the right rental price for your property, make sure you rent to someone who can afford it. Generally, tenants should pay about 30% of total income in rent. A renter making $70,000 pre-tax can reasonably afford to pay $21,000 a year or $1,750 a month in rent. You’ll want to make sure you’re renting to someone who can afford your place to avoid late payments or having to evict someone for non-payment altogether.