Securing your first investment property is a great achievement, but it’s not the last step when it comes to establishing a stream of passive income. It’s up to you to find and keep valued tenants. Many first-time landlords ask the question, “how much should I charge for rent?”
The answer will depend on several factors ranging from location to property size. However, one thing is certain: deciding how much to charge in rent will directly impact your bottom line as an investor. Therefore, consider the following when establishing the monthly rent for your investment property.
Why Is Appropriate Rent Important?
The appropriate amount of rent will determine two things: how likely you are to attract tenants and how much cash flow you can generate each month. If the property is priced too high for the area, tenants will simply choose other properties instead of yours. Further, tenants may not have the income necessary to afford the property and will need to look elsewhere for housing. This can leave you vulnerable to vacancies.
If you price a rental unit too low, you risk losing out on valuable income each month. Remember that rent is what will cover your mortgage payment and other operating costs associated with the property. If you sell yourself short, you may not generate a profit on the investment. You could risk cutting into other funds. The key to a successful rental property is to find the right rent that allows you to stay marketable in the area and maximize your income over time.
What Affects The Price Of Rent?
Just like the homebuying market, there are numerous factors that affect average rental rates in an area. As a landlord it is crucial to pay attention to the following factors that could impact the price of rent:
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Rental Market Trends
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Location
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Size
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Income Of Residents
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Term Of Lease
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Seasonality
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Amenities
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Rental Market Trends
Rental prices have been increasing across the country as the world rebounds from the COVID-19 pandemic. However, it is still important to pay attention to local trends before setting a rent price. Research your market to see whether this trend applies in your area. Are prices going up or down annually? What percent of the market is made up of renters? What is the median rent on a property of your size? This information can help give you more context when looking at the rental market.
Take time to search other properties in your area and survey the average rent and time spent on the market. Then, look at property management companies in the area and assess the competition for rental properties. When buying a house, this is referred to as researching comps — but the same process applies when setting a rent price.
Location
Location is widely known as the most critical factor in real estate. After all, you can change almost anything about a property, but you can’t change where it’s located. Research the area your rental property is located and take note of the local neighborhood and economy. Look at the job market, percentage of people moving to the area, and more as you assess the property’s location. These factors will give you a better idea of how desirable the neighborhood is and help you determine a fair rent price.
Size
The size of the property will also play an essential role in how much you can charge for rent. Always consider the square footage of your rental unit when looking at comparable properties. For example, if you are renting a two-bedroom apartment with 1200 square feet, you will likely be able to charge more than a two-bedroom apartment with 850 square feet. Extra space can go a long way when setting rental prices, even if your property features the same number of bedrooms or bathrooms as a similar unit. Break down the average price per square foot when you research other rental units in the area.
Income Of Residents
An often overlooked component to setting market rent is the median income of residents in the area. Many landlords require tenants’ income to be roughly three times the monthly rent. Consider what the average income is and whether or not your ideal rent would allow for this requirement. If the numbers don’t add up, you may have trouble filling vacancies. While there may be exceptions for popular markets or commuter cities, it is still an important number to add to your calculations when determining how much to charge each month.
Term Of Lease
It is not uncommon for landlords to adjust rent based on how long the lease term is. Generally speaking, landlords will offer a slight discount for longer lease terms. The reason for this is because by securing a tenant for a 12 or 18 month period, you are eliminating the costs associated with finding a new tenant and preparing the property for them.
With a short-term lease, such as six months or month-to-month, you may be able to charge slightly more than the typical monthly rate. Many renters will be familiar with the extra costs associated with a more flexible lease term. By remaining open to slight price changes, you can use the lease term to set an attractive rental rate.
Seasonality
Think about the time of year you are listing the property for rent. According to research from Apartment List, rental demand spikes in the late summer months from July to September. For some landlords, this means offering slightly lower rent in the winter to help protect against vacancies. It will all depend on the time of year you need to search for tenants. Remember that timing can also vary from market to market, so be sure to research seasonality before setting a rent price.
Amenities
Popular rental property amenities include parking, on-site laundry, outdoor space, security, lawn care, and more. Think about what amenities you are offering with the rental unit and how much renters would be willing to spend. For example, if you include a washer and dryer, tenants may be willing to pay a slightly higher rent per month. Research properties with similar amenities to get a better idea of where to start. And remember, you need to advertise these amenities in your property listing to ensure tenants know what they are paying for. While it may seem like a small difference month to month, charging for amenities can make a significant difference over time.
How Much Should I Charge For Rent?
There is a common principle in real estate investing called the one percent rule. This rule essentially recommends the monthly rent for a property to be between .8 and one percent of the total property value. For example, a $350,000 single-family home would rent for approximately $3,500 a month. However, there are certain limitations when using this formula. Most notably, it doesn’t take into account the factors listed above.
The best way to determine how much you should charge for rent is by assessing the market factors listed above. Ask yourself how much similar properties are going for, how long of a lease term you prefer, and what amenities are included in the price. Don’t forget to look at economic factors associated with the neighborhood as well, as these will tell you how likely you are to bring in tenants.
Keep in mind that you can increase the rent later on as the property value goes up or demand increases in your area. There is always flexibility in setting your monthly rent number — until you lock in a tenant, that is. Research the above items to help identify a good place to start. While it can take some time, a thorough property analysis is the only way to ensure you land on the correct number.
Summary
There are so many factors that determine the average rental prices in an area. Asking, “how much should I charge for rent?” is common among landlords and other rental property owners. Start by researching your market and build on the notes you collected before buying the property. You can even ask the past landlords or your property management company for a second opinion on how much to charge. Determining the correct rent amount will take some time, but it is the only way to guarantee consistent cash flow over time.
What is the number one factor you consider when setting rent rates? Share in the comments below.
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