Determining The Rent Amount To Charge
October 3, 2022
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How To Determine The Rent Amount To Charge
Your rent rate is a central decision you must make before starting your rental business.
Determining appropriate rent pricing could be challenging if you’re not accustomed to market research. Your rate needs to be competitive, but also accurate to the value you’re offering.
Your rate also depends on your business’s operating expenses. You need enough income to pay off your mortgage, cover property taxes, and handle maintenance costs. However, if you set your rates too high, you won’t attract enough tenants to fill your vacancies.
How do you find the right balance?
The key to choosing an appropriate rent rate is learning to evaluate the rental marketplace. The more properties you acquire, the more experience you’ll gain and the better instinct you’ll develop for it.
This article will outline basic strategies and best practices for determining your rent rate.
Research Similar Properties
Before deciding on your rent rate, you need to know your market.
Your first step should be to get a general idea of what landlords in your area are charging. Start with local properties like your own. What is the average rent price among these properties?
Organize your research in a spreadsheet, with columns for features and amenities. Be sure to include:
- Street address
- Rent rate
- Type of property
- Number of bedrooms and bathrooms
- Square footage
- Amenities (utilities included, additional facilities, etc.)
- Relevant miscellaneous features
Explore Listing Sites
Listing sites are the first place you should look to find out about local properties. Try browsing Zillow Rental Marketplace, Apartments.com, Trulia, Facebook Marketplace, and anywhere else properties are listed.
As you read, add data to your spreadsheet. Pay special attention to the square footage and lists of included utilities and amenities, as these increase prices the most.
Listing sites are also useful for their wide range. If your property is relatively unique in your town, try to find an equivalent match in another city. However, keep in mind that rates vary substantially across the country. The rent rate for an apartment in Austin will be much higher than the rate for an identical property in Des Moines.
Network with Local Landlords
Another way to get information about other properties is to network with local landlords. This could mean joining local real estate organizations, building personal relationships, or reaching out to someone on social media.
Networking is an opportunity to learn more about being a landlord while gathering intel about what makes a good property and a fair rent.
You can also learn from your peers’ mistakes. For example, try asking other landlords what they initially thought was an appropriate rate and whether they were successful.
Ask a Realtor
Realtors possess a wealth of knowledge about properties and local housing markets. The best way to learn about pricing is to ask someone who knows more about real estate than anyone else.
You can consult with a realtor even if you don’t plan on selling your property soon. Realtors often have insider information from their experience as investors themselves. This gives realtors a unique perspective as they are especially aware of trends in the industry.
Use the Multiple Listing Service
Realtors also have access to the Multiple Listing Service (MLS), a database used by real estate brokers containing information on properties for sale. You won’t find this valuable information anywhere else, so take advantage of it.
Assess Value Added
Now that you’ve gathered all the information you can about local properties, it’s time for some reverse engineering.
This strategy requires you to work backward from the rent rate. Ask yourself, “How did this property owner decide on this rate?”
To answer this question, you’ll need the list of features and amenities you just created. Each feature adds a certain amount of value to the property and therefore justifies an increase in the rate. By comparing property amenities and rates, you can approximate how much a certain amenity is worth in today’s rental marketplace.
For example, let’s say you notice that properties with in-unit laundry facilities rent for about $100 higher than similar properties without them. Based on this comparison, you can estimate that in-unit laundry is worth about $100 extra each month. If you offer laundry facilities at your property, you can expect to increase your rate by about as much.
Do a similar analysis for square footage, property type, and other amenities. It’s okay if your results are only estimates. It’s impossible to truly know how a unit was priced without an itemized list from the landlord. However, you can usually get a pretty good idea simply by comparing data.
Identify Rent Tiers
Another approach is to identify and analyze rent tiers.
Begin by looking at the price spread among the properties you researched. Do your best to categorize the properties into tiers based on price per square foot.
Then, place your property into one of the tiers based on its size. Does the price you had in mind fit in with other properties of the same size?
You might also consider ordering the properties within each tier based on added features and amenities. Think about which amenities you are prepared to offer. If you’re planning to offer the same amenities as the property occupying the top of the tier, your rates might fall close to theirs.
Remember that within every tier, there will be some variation. The key is to realize that, like any smart customer, a renter wouldn’t choose a property at the top of a tier if it has the same features as another, cheaper one.
On the other hand, if your price falls on the lower end of the tier, ask yourself whether you’re offering just as many amenities as the next property up. If so, you might not be getting the highest return on your investment.
Rent to Value Ratio
Another way to determine an appropriate rate is to calculate your rent to value ratio. This ratio is your monthly rent divided by the cost basis or total value of your property. The higher the ratio, the more cash flow you’ll have. Many investors cite a 1% threshold as an ideal ratio.
Choose a Rate
Careful data collection and market research should lead you to a competitive but reasonable rent rate. Although you’ll doubtlessly need to adjust your rate as circumstances change, you can rest assured that your choice was well-informed.
As you anticipate generating revenue, you should also plan how you’ll collect rent from your tenants. Property management software tools like online rent collection can save you hours of time and trouble when it comes to rent receipts and records.
Setting your rent rate is one of the first decisions you’ll make as a new landlord in your rental business. If you don’t charge enough, you won’t achieve the best return your business could deliver. However, a successful rate guarantees you enough revenue to keep up with property expenses and then some. Before long, your property will be generating the passive income you initially set out for.
Next, you’ll need to market your rental property.