Median or Average Rent? Which Should I Choose for My Rental Property?
When you learn how to set rent rates accurately, you will be well on the way to success as a real estate investor. The rent you collect provides the ongoing cash flow to cover the: mortgage, insurance, taxes, utilities, repairs, and other recurring expenses for your property. Plus, you need it to fund your reserve account and carve out a profit.
Determine how you will set your rental rate
The first step is to determine how you will set your rental rates. Many investors use the 1% rule: If the property is worth $100,000, they charge 1% of that value per month, which comes to $1000. This rule may not apply equally across all neighborhoods. If you have a home worth $500,000, it is unlikely that you will be able to charge $5000 for rent.
Examples of rent charged by other area landlords and investors also make a good place to start. Research what other landlords charge for a comparable property to find a base price range. You can then adjust the base price, depending on how your rental compares on a few factors – the property's condition, immediate location, and any updated amenities. A well-maintained property with better amenities in a nicer part of town will rent for a higher amount than the same size property in disrepair or one located in a less desirable part of town.
Real estate investors can also use online tools to inform how they set their rent. You could review rental listing websites to compile a list of properties similar to yours and look up the locations. Calculate an average rent and determine whether your property's characteristics put it above or below a typical property on the market.
Consider an online rent evaluation tool that will compile rent data and more.
Rentometer is an online rent evaluation tool that searches all the major online listing sites like Craigslist daily to pull current rental listings into one database. You can then enter search criteria, and Rentometer will find the properties that match your criteria and calculate a "Rentometer" range for low, medium, and high rent.
Rentometer's Quickview report will show you if your rent is reasonable for the area. Reasonable rent is when it falls into the range shown in the green section. If your rent shows up in the red section, it's likely overpriced for the area. The middle white section shows the area's median rate: 50% of area rents run below that rate, and 50% run higher.
The Quickview report also graphs the lowest 25%, the median, the average, and the highest 75%. Depending on your property's amenities, condition and location, you can adjust your rental rates according-ly.
What is the difference between median and average rent?
If you're new to an area or looking for tenants to lease your out-of-town rental property; you may want to default to a rent rate at either the median or average rent and see if you attract applicants. But when choosing either median or average as your point of reference, what's the difference?
The median rent falls dead in the middle of the range. 50% of area rents are higher, and 50% are lower. For our example, we want to determine the right rent for a 2-bedroom, 1-bath unit at 31 Santa Rosa Avenue. Rentometer tells us that the current median rent is $2,829 per month, while the area's average rent is $2,866, slightly higher than the 50% rate.
How does this information shape your decision?
This is where on-the-ground neighborhood knowledge and expertise come into play. The property at 31 Santa Rosa Ave. has been updated. It has new hardwood floors, fresh paint, and a kitchen makeover that includes new cabinets and granite countertops.
How do these upgrades compare to the state of properties renting at the average rental rate? Are these properties similarly updated? Do they have better amenities? Are they in a more desirable location?
If other properties listed for average rents are in generally good condition and in a similar location – and offer the same amenities as your property— you can charge a rent that's slightly higher than average for your updated unit.
Going the other direction, if other properties are: in better condition, situated one block closer to the beach, and included free off-street parking … and your property has none of those advantages … you may want to stick with the median rental rate.
Should I choose median or average rent for my rental property?
Using Rentometer, you can run this analysis for any property in any city. If you are new to setting rents, need a refresher, or are researching a purchase or new area; Rentometer can help. With the tools, you can determine a reasonable and appropriate rent to plug into your financial calculations. With Rentometer to complement your real estate knowledge, you can easily set a rental rate that is both reasonable and profitable.
Get started with Rentometer today
While there are various online rent evaluation tools available, Rentometer is the only one that updates new listings daily. Rentometer also maintains a comprehensive database of listings. With the basic search features of Rentometer, you will get a Quickview of any property. These searches are based on your criteria for the number of bedrooms and bathrooms. This can give landlords or property managers a good start on whether their rent is in the low, reasonable, or high category. Anyone can run five free pro reports with the free Rentometer tools and seven days of access.
When you upgrade to Rentometer Pro, you have access to:
- neighborhood trends going back two years
- a moving average for the last quarter
- plus the rent distribution across 1 to 4 bedroom units in that neighborhood.
You can use this data to purchase a new rental property and set more accurate rents. Find out how Rentometer can help you set profitable rents for your rental property starting today and ensure long-term success for your business.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology. If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.