Establishing the rental rates for investment properties impacts its overall profitability. The importance of the exercise dictates a careful approach because setting the rates too low leaves money on the table, while rates too high could reduce the pool of likely tenants and slow absorptions.
A real estate agency that specializes in property management can help you determine how much to charge for rent based on pricing exercises and analyses. They have access to the proprietary real estate data that simplify the pricing process.
However, as an investor, it is helpful to know the elements of the pricing process.
How to Determine How Much to Charge for Rent
Using the Formula
The industry formula for establishing a baseline for monthly rent is to multiply the value of your home by 0.8 percent to 1.1 percent. For example, a home valued at $200,000 would rent from $1,600 to $2,200. Factors that would mitigate the monthly rent include:
- Condition of home.
- Rental rates in the neighborhood.
- Demand for rental homes in the area.
This pricing model depends on having an accurate sense of the value of your property, which fluctuates depending on market conditions. A licensed appraiser can help you establish its current value based on recent sales of similar properties in the area. They compare the condition of your property, its size, and features.
See also How to Save Money on Maintenance
Checking out the Competition
Before finalizing the rental rate, it’s a good idea to compare it to the competition. Websites like Craiglist, Zillow and Trulia make this exercise fairly simple, although it can be time-consuming. All three list properties for rent, but Trulia.com is the only one that lets you search by zip code.
Examining the homes available for rent that nearby and similar to yours will give you the most accurate idea of whether your asking rent is reasonable. To execute a competitive analysis, you’ll need to enter property essentials into spreadsheet software. Include these data fields in your analysis:
- Home square footage
- Rental rates
- Garage size
- Yard size
- Amenities (like pool, community amenities, kitchen upgrades, bathroom upgrades)
Trulia and Zillow let you select the property type and price ranges of homes for rent, which helps you keep the homes you select relevant to your analysis. You can also save your search for later reference in the event you don’t finish the exercise in one sitting.
Once you’ve input the data, look at the mathematical medians and averages for rental rate, square footage, bedrooms, bathrooms and rental rate per square feet. Look over the amenities of the available properties and compare them to what your home has. If your property has more upgrades, you could raise the rent to increase your cash flow, or maintain it to rent the unit faster.
Crunch the Numbers
Once you’ve established the rental rate, compare it to your actual property costs. After including its PITI (payment, insurance, taxes and insurance) HOA fees, repairs, and maintenance costs, the difference between your costs and the rent represents your cash flow. There are also tax considerations to factor into the analysis that will impact your bottom line.
Playing with the rental rate pricing could affect how quickly you rent the home, and how long you keep the tenants, especially when the supply and demand balance is tipped in favor of the renter. Even though home shoppers probably don’t go through an elaborate demand or pricing analysis, they do understand inventory volume and value-based pricing.
The Bottom Line
Knowing how to price a property for the market combines objective and subjective factors. The exercise will help you understand local conditions and how to better position your rental for a greater return.