Knowing how to determine rent price is critical for your property. Investing in income-producing real estate is only a benefit to your portfolio if you can get the right price for your property. Set that figure too high and you might not be able to retain tenants. Set it too low, and you may either miss out on revenue or end up without the quality of tenants you want in your rental home.
This guide will walk you through everything you need to know to set the ideal rental price for your property, from how to choose the right real estate investment at the outset of the process to the factors that influence the monthly amount you should be asking.
Choosing the Right Investment Rental Property
Setting the right rental price starts with choosing the right property. There are several facets that go into choosing an ideal investment property. Take a look at the home’s price and what other rentals in the area go for, then carefully consider factors such as:
Where is the property located? A rental in a good area of town can go for a higher monthly amount than a property in a less-affluent area.
Before you choose a new property, consider how many renovations the property will need. If you need to take care of more extensive renovations before renting out the property, it can increase your initial investment and leave you needing to charge more rent in order to effectively pay the mortgage and pay off the rest of your investment in the property.
The Size of the House
Size matters when it comes to choosing the ideal rental property. A large property will often go for higher rent than a smaller one. Keep in mind, however, that you do have to consider the property’s location as well as its size, since properties in certain areas may be worth more than others.
Considering these factors means you can often make a better decision about whether to purchase a house. When it comes to rental properties, it’s always better to walk away from a potentially bad investment than to invest in a money pit that could leave you scrambling to pay for the mistake.
4 Ways to Determine the Best Rent Price
Your rental price can have a huge impact on your business, including whether you can attract renters or will struggle to pay the bills associated with the property. You must thus take a look at several important factors to be sure you have determined the best price for your rental properties, including:
1. What rent do other properties in the area go for?
Units of a similar size and value should be your guide. How much do they typically go for in the local market? Consider the assets, benefits, and options offered by those rental properties. Make sure you include the number of bedrooms and bathrooms as well as the actual square footage of the unit as you evaluate what your unit is worth compared to others on the market.
2. Which benefits does your property offer?
Take a look at your property compared to others in the local area. What do you offer renters who choose your unit? You may want to look at:
- The number of bedrooms in your unit
- Whether you offer a washer and dryer or other important appliances
- What services you provide to your renters, including trash pickup, pest control, or yard maintenance
- Whether your unit is part of a larger complex that offers features like a pool, a party room, or other important amenities
Many renters will pay higher rent prices for amenities that appeal to them and their families.
3. How much are you paying for your rental property?
Consider the expense associated with purchasing the property, including your monthly mortgage, as well as other costs associated with running the property, like property taxes. You may need to include the costs of regular maintenance costs and repairs or calculate the cost of using a property manager. If you use a property management company to handle rental units, you should include only the cost for that unit in your calculations. If you cannot set a fair rental rate while still covering those expenses, it might be a good idea to consider a different rental property.
4. What season is it?
People are more likely to move during the summer months. Moving is naturally more inconvenient during the winter, especially for families that have children. If you need to put a unit on the market during the winter months and you need to bring in renters fast, you may want to reduce the number. The potential rent you can collect during those months may be enough to offset the long-term loss from lower rent, especially if you need that rental income to pay the mortgage.
Once you have set your rental price, keep an eye on changes in the market or in the local area. You may need to adjust your rental prices annually or between renters in order to maximize the benefit to you.
3 Common Mistakes in Calculating Rent Price
Are you getting ready to set the rental price for a new unit or recalculating the ideal rent for your current one? Avoiding these mistakes may mean you are able to set a more effective rate.
Mistake #1: Using the 2% rule alone.
Many landlords use the 2% rule to determine how much rent they want to charge: they charge 2% of the current market value of the property in rent each month. While that number is a good starting place, it’s important to take a look at the rental market in your area and carefully consider comparable properties before setting your rent. The 2% rule may aid in your collection, but there are many factors to consider as you set the cost per month for your properties.
Mistake #2: Failing to take your cash flow into consideration.
You may have money going out to pay the mortgage, take care of maintenance costs, and manage property taxes. If you don’t consider your costs in your calculation, your investment property can quickly become a money pit.
Mistake #3: Ignoring other properties in the area.
Many landlords make the critical error of failing to carefully examine other properties before setting their rental prices. You can have a great property, but if you fail to examine other rentals in the area, you might not know how much to charge in order to maximize your income while still attracting tenants to the property.
If you have made mistakes in setting rent in the past, you know just how detrimental it can be. Luckily, by taking a look at these mistakes, you can help set yourself up for higher levels of success as a landlord.
Work with the Professionals
Do you have questions about how to set the ideal rental price for your rental property? Many real estate investors have successfully navigated the rental market with these strategies. If you still have questions, Nomadic Real Estate can help. Contact our team today to speak with an expert about any questions you might have about property management and how to determine rent price.