When you own or manage a rental property, your success hinges on renting out the property rented at a rate that earns you a profit. But how do you know what rate the market will bear – and provide the desired cash flow to cover your mortgage and expenses?
Two factors determine rental rates:
2. The rental property itself
How do these factors play into your rental rate? Here are the 13 questions to consider when setting your rent.
1.) How does location affect rental rates?
The property location always matters. After all, you can't compare a property in a less desirable part of town to a property in a new development. Even with the same bedrooms, same square footage, there is no way you can charge the same in rent. In each location, you have a tenant base you need to consider, along with amenities in the area.
When researching rents to determine where your property fits into the spectrum, you want to understand the historical rents in the area, how other similar rental properties compare, the tenant base, safety, and amenities in the community.
2.) What's the historic pattern for the property's rent?
When you research a specific area, you want to look for past trends in rental prices. Where did rents charged by previous landlords fall in the rent spectrum for the area? There are online tools to help you take a look at past rental trends. Rentometer is a rental rate evaluation tool that allows you to explore a property address and go back four years to see what rent was charged over that period.
If the property you purchased has not had any significant updates; like new flooring, countertops, updated or new bathroom, and new amenities have not been introduced into the area; like shopping or a gas station, your rental rate might mirror the historical average – neither the property nor the neighborhood has seen improvements to warrant higher rent.
3.) What are other property managers charging for rent in that area?
It's important to know what other landlords are charging in order to keep your rental rates competitive. Keep in mind this should only be a baseline. Your property may be larger, more up to date, and have a better view or access to services in the area than another property. You can get a feel for what other property managers are charging by using Rentometer, Craigslist, and separate apartment listing websites to compare what's current with asking rents.
4.) How safe is the neighborhood?
If your tenants don't feel safe, they may not stay in the neighborhood. For instance, if the area has a high crime rate or is near noisy, busy intersections, you may have a hard time attracting tenants. Your rental rate in a less desirable area will naturally fall below the "average" rent for the property's type and size.
5.) Is your property close to everyday public services?
The neighborhood's walkability plays an important role in how attractive it is to potential tenants. Is your property close to shopping, gas stations, schools, medical services, or public transportation? If these services are within a 5-minute walk from your rental, you will be able to charge more for rent.
Location is always a driving factor in setting rents. If you can buy a desirable rental property in a desirable location, it stands to reason you can charge more than what you could in a less desirable location.
6.) How does rental property affect rental rates?
Many investors look for the least attractive home on the block for a profitable rental or flip house. This is the type of house you can typically buy for a reasonable amount, without too much haggling, and add value by making repairs and updates to the property. An updated property will command more in rent, while a dated property that has seen better days and needs a lot of work will bring in a lower rent rate. The condition of the property does matter.
7.) How does the size of the unit affect rent?
Tenants will consider the total square footage of a property when searching for a place to live. You can charge more for a property with more square footage than you can for limited living space, even at the same number of bedrooms and bathrooms.
8.) Why does the number of bedrooms and bathrooms matter?
According to Rentometer reports, asking rents can vary $200 or more per additional bedroom. Each area is different, but it's safe to say that the higher the bedroom count, the more you can ask for rent. The number of bathrooms also affects the rental rate.
The difference between a house with one bathroom compared to one with even a bath and a half averages about $300. This amount could be higher in more desirable neighborhoods where families with children are looking to rent your property, rather than a single person or a couple.
9.) How does the neighborhood's immediate physical environment affect rent?
We've discussed location in terms of access and convenience, but not as an amenity unto itself. A scenic property can rent at a higher rate than one that is next to an industrial area. If your rental is on or near a water body such as a lake, pond, river, or stream, you can charge more rent than for one that looks out on another apartment building or parking lot. A secluded yard, a screen of trees for privacy trees, or attractive outdoor space will boost a property's rent over one with no yard or little space between houses.
10.) How recent are updates to your rental property?
Carpeting is fine in a rental property – but if it comes in the form of tired, 1970's green shag, your tenants will not want to pay top dollar. If you've invested time and money to update the property, you can ask more in rent. Not every home warrants updates like granite countertops, hardwood floors, and stainless appliances. Even relatively inexpensive improvements like new flooring and fresh paint will allow you to charge more rent.
11.) Does your property include special amenities or extras?
Amenities or extras for a rental property can be anything from a garage or storage shed, to on-site laundry, pool, exercise room, and more. Anything useful or attractive to tenants beyond the actual living space can be considered an amenity. Depending on comparable rental rates overall, adding amenities might allow you to charge higher rent,
If you cover utilities or provide a washer and dryer, you can ask more for rent. Most rental properties come with appliances; if yours does not, and your tenants need to provide their own, they will not be willing to pay top dollar for rent.
A few more considerations when setting your rental rates
12.) How do the seasons affect rent?
Depending on your location, there are seasonal patterns when tenants typically move in and out of properties. For the most part, tenants want to move into their new home before the weather turns cold. In the Midwest, this could mean moving activity slows down after October or November, as not many people like to move during the winter months. If they plan to move, tenants may start looking for a new home in the spring or early summer and move throughout the summer. This pattern is not set in stone but gives you a predictable framework for tenant turnover. What does this mean for your rental rate? During the busy season for move-ins and move-outs, you can charge more during slower seasons when it's more inconvenient to move.
13.) How can operating costs affect rent?
If you've had a vacancy for a while, you are likely anxious to get a new tenant in the property. If you have not been able to sign a lease at your asking rate, consider dropping the rent by $20. The burden of operating costs – from debt service, utilities, taxes, and insurance – can weigh heavily on any landlord's checkbook. There may be times when you allow a tenant to move in at a reduced rate (for a set period of time, i.e., the first 2-6 months of the lease) to ensure you can cover operating expenses. As a landlord, property manager, or investor, your goal is to earn cash flow. You need to balance the cost of prolonged vacancy with the impact of reduced rent to stay on track with that goal.
When you set your rents, do your research first. So much of the real estate business involves due diligence, so setting your rental rates should not be any different. Keep in mind that you can always start out asking for a little above average rate to see what the market will bear. You may have a property sit vacant an extra month or two, but if you can weather that and you get the higher rate, you'll have a higher benchmark for the future and more cash flow.
There will always be a delicate balance between what you want and what the market can afford – when you do your research, you'll be a pro at setting rents and keeping your rental property occupied.
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