One question all rental property owners ask themselves is, “how much should I charge for rent?” The answer can be somewhat complicated. Ultimately, determining your rent price should be broken down by a few different characteristics, including knowing your competition, seasonality, amenities, and rental control laws.
Here’s a closer look at how to figure out how much you should be charging for rent.
If you’re wondering how much should I charge for rent, there are a few things you want to keep in mind:
It’s never an easy answer to figuring out how much you should be charging for rent. Determining this number will require some research on your end.
Marketing your home for lease starts with a comprehensive look at the market. This research will help you to understand better what a well-qualified tenant will pay you each month. This research will help answer your question, “How Much Should I Charge For Rent?”
If you choose too low a market rate, you will not make as much money as you should. If you decide over market rate, it takes longer to lease (another money waster) and might be leased to the wrong person.
Generally speaking, two kinds of tenants are willing to pay more than market rent for a house.
The first type of tenant who will pay above-market rent isn’t familiar with the area and, therefore, unfamiliar with what they should be paying. These tenants wise up a few months into the lease and usually end up being short-term tenants. They typically leave after a year, which makes them less than ideal tenants for your rental property.
The other type of tenant who will pay you above-market rent is worse than the first. This tenant is a less than qualified individual willing to pay more to tempt you to overlook their credit shortfalls.
You may get excited that they’ll pay more than the house down the street, but be careful. You will be assuming more risk than is necessary, and if it turns out bad, an eviction could be in your future.
Rent prices can be significantly affected by seasonality. Nationwide, rental property demand peaks during the spring and summer and is at its lowest during the year’s winter months.
What this means for your rental property is that if you list it in the winter, it is more than likely going to stay vacant for longer. Some property owners might drop rent prices during the winter to avoid having their units sit empty for an extended amount of time.
In doing your research, you’ll want to consider the different amenities your property has to offer prospective tenants. Some of the top amenities renters are looking for include:
Lastly, you’ll want to make sure you’re up to date on the latest rental control laws in your area. These laws, dictated by both city and state, can directly impact the amount you are legally allowed to charge for rent. You can look into the National Multifamily Housing Council resources for more information on general state rental control laws to start.
While you are working on finding the market rate of your home, keep one fundamental truth in mind – tenant prospects, unlike buyers of homes, have a very short-sighted mindset. This concept means that when a buyer is looking to purchase a home, it’s not unrealistic for them to take months or even years to buy one. However, tenant prospects will not take months, much less a year, to find a place.
Tenants tend to have three or four characteristics they are looking for in a home. They will settle on the first one in their budget that checks all those boxes, typically for fear of someone else renting the house.
As such, tenant prospects will be comparing your home to what is available to them in that time window. Therefore, the most critical data you can determine is an accurate measurement of the homes you are competing against.
Let’s look at some techniques you can use to find the market rate.
Formerly two companies, these two joined forces in recent years. If you are unfamiliar with them, they take local real estate data and extrapolate certain assumptions. These include the value of homes, the future value of homes, and the market rental rate of the house.
You might hear of people who snub their nose at the values these websites provide of their home, citing things like their inability to determine amenities or specific other unique characteristics their home has and assign an appropriate value to it. While they are correct that it is hard for a computer algorithm to determine an accurate value, tenant prospects look at these values and find them helpful.
Homes that are too far out of line with these values typically don’t get as many showings as homes with marketed rental rates that are more in line with Zillow or Trulia’s values. To some degree, they’ve become a self-fulfilling prophecy, particularly in an age when data is so widespread and available to everyone.
Using Zillow or Trulia is simple. Just type your address in the box after you’ve chosen “Rent.” Once you click “Search,” you’ll see your property, and off to the right will be some nearby properties for rent. You’ll need to determine if they are comparable properties or in a different type of neighborhood or the house is different.
Search the available homes on local property managers’ websites to determine if they have any nearby. By doing this, you can determine what the professionals think homes are worth in that area. You can also look at the pictures on their site to determine if the houses have similar features and amenities.
When you pull up all of the listings on a local property manager’s site, you can filter several ways to see any houses we have in your general area. You could then pull up the map view and see if there’s anything close to your home.
Once you find a similar house, scan through the pictures. Now, you can determine based on the 50 photos if this house is similar to the one you’re trying to rent. The question, “How Much Should I Charge For Rent?” becomes easier to answer. Some local property managers even have software that will pull up comparables for you.
Local, on-the-ground knowledge of what homes have rented for in your neighborhood is an excellent way to determine how much you should charge for rent.
Is there a house near you that you know of that’s been rented recently? Can you ask them how much they rented their house for? This “boots on the ground” data is beneficial when determining how much your home will rent for.
What homes are currently available for rent in your neighborhood? Drive your area and look for ‘For Rent signs, and call to inquire. When you do this, you’re able to ask questions to gauge if the house for rent is similar to your home. It’s always good to do a little competitive analysis as well.
One of the best ways to determine how much your house will rent is to pretend you are a tenant looking in your area.
Much like a tenant would, determine a budget and find out what you can rent in your neighborhood for that budget. In “tenant mode,” start comparing your house to the available options to determine which place you would rent for that budget.
For example, if you have $1,500 a month and want to live in this neighborhood, what are your options?
Now, if you look at those houses, and those houses are better than your house, obviously you know you need to price it lower than those. If your house is better than the available options, you’ll know you have two options:
The point is that if you want to find that GREAT tenant for your house, it’s best to take the emotion out of it when deciding how much should I charge for rent. Do your homework and strive for actual market rent. Great tenants will be happy paying market rent, and bad tenants will agree to pay ‘above’ market rents to get in a house.
Ultimately, your goal is to keep a tenant long-term in your house. A long-term tenant is as valuable an asset to you as the house they’re living in. It costs more money when short-term tenants fill your properties and vacate after 12 months.
Whether you are an investment property owner, someone trying to sell your house, or looking to grow your portfolio, we have the information you need. Check out the Evernest YouTube channel today to learn the ins and outs of buying and managing your rental property.