Having a competitive rental rate is important to any landlord. But if you aren’t prepared, determining the right rental amount can be overwhelming. You want to make sure that the rent you charge prospective tenants is attractive.
Charging too much might make it unattractive, while charging too little can eliminate the profit potential.
So how do you choose the proper rent price for your property?
Here are some factors to consider.
1. Amenities determine the proper rent price
Avoid setting a standard rent price, unless the units are identical. Instead, charge rent based on the amenities that are included. Here are some questions you should ask yourself regarding amenities:
• If you are renting a condo, are there building amenities, such as a pool or fitness center, that should be included?
• Will you allow pets? If so, will you simply take a deposit or factor that into rent?
• Will your rental property be furnished?
• Is parking included?
• What about lawn maintenance and snow removal? Will you or the tenant be covering that responsibility?
• Will you be including utilities in the rental price, or will the tenant have to pay that independently?
2. The one percent rule of thumb
The one percent rule states that the gross monthly rent should be at least one percent of its final price. Basically, this means that you can charge around one percent of your home’s value for rent.
For properties that fall above $100,000, you would calculate the rent using a slightly lower percentage of 0.8%. Conversely, for less expensive properties, you would use a higher percentage around 1 - 1.1%.
For this rule to work however, you would need to have the right property valuation.
3. Check out the competition
See what other landlords are charging for comparable properties in your area. A way to go about this is to go over your local newspaper. You can also check the rental listings on Craigslist. This will give you an idea of the average going rent rate in your area.
Additionally, you may also want to go and check out other similar properties in person. For a good estimate, the properties should be similar in both size and condition.
Also, you may want to talk to other landlords or realtors in your area. Ask them what they think your properties should rent for.
4. The right rent is profitable
Rental properties should be profitable. The rent price should, at a minimum, be enough to cover all of your property expenses. For you to be profitable as a landlord, the rent should cover:
• Vacancy costs
• Maintenance and repairs on the property
• Your mortgage payment
• Insurance costs
• Property taxes
• Emergency repairs
With the right rent, you should be able to have, on average, about 6% of the rent as profit.
5. Consider market shifts
The housing market shifts every once in a while. Therefore, it’s important to know where the economy currently stands. Adjusting your rent to accommodate such fluctuations is crucial.
6. Livability leads to profits
Livability is the sum of the factors that add up to a community’s quality of life. For example, scenery, environmental quality, and access to services and facilities.
To determine your property’s livability, consider how your specific rental unit is different from others in the area. Ask yourself the following questions: Does it have more space? Does it offer a better view than most other units? How attractive is it to potential tenants?
7. Compare historic unit prices
Adjust your price accordingly by checking the historical unit prices. You may need to ask the previous owner directly. You may also be able to find this information on real estate websites like Apartment Guide.
8. Take into account your vacancy tolerance
Vacant properties can be costly. They can quickly fall into disrepair and may become a target for vandalism, theft and arson. That being said, some landlords can be tolerant to vacancies than others.
For instance, you may be able to survive a few months without a problem if you’ve afforded a big down payment and your monthly expenses aren’t a burden. In such a case, you may be able to wait for the right opportunity to cash in. If not, you may need to fill the property as soon as possible.
These are most of the factors that a landlord needs to take into account when choosing the proper rent price for their properties. With the right rental price, your tenants will find value in the property and in what they are paying. Who knows, this may even set you up for a great landlord-tenant relationship.
This is a great list Jamie.
Point #3 is probably the most important. You have to put yourself in the prospective tenant's position. Why should they rent your property over someone else's? It all comes down to value. What are you offering in terms of location, condition, amenities, etc. vs. what is your price?
I would caution against using the 1% Rule as a guide for setting rents. It can be skewed by the valuation as you point out.
Instead, I recommend using a professional rent estimate tool like RentRange or RentFax. They provide an in-depth analysis of your local market including historical rents, comparables, vacancy rates, and of course a rent estimate.
There are free sites that offer rent estimates but I've found these pro sites to be more accurate, more detailed and very affordable at around $15 - $25. It's worth the price to know you are charging a fair and competitive rent price.