How Much Should I Charge for Rent: A Guide to Rental Rates
As an independent landlord, it’s important to understand that the key to landlord success begins with setting a rental rate that is not only profitable for your property, but also is competitively priced to attract good tenants.
Determining the proper rental price can be challenging. While you could be tempted to get aggressive and charge a high premium for your unit compared to other similar units in the area, setting the rent price too high it could lead to long-term property vacancy. Conversely, setting the rent too low will hurt your bottom line.
Below you’ll learn more about finding the rental price sweet spot for your unit, as well as tips for getting a good rent estimate, and the importance of including your amenities before setting your rental rate.
Why is it important to charge appropriate rent?
Before we dive into the discussion on what is a good rental price, let’s briefly mention why it is important to ensure you’re charging the right price:
1) It helps you place the right tenants and get paid on time
According to a TransUnion survey, payment problems ranked as the top concern by 84% of landlords. This is no surprise when the cost of an eviction resulting from nonpayment can run up to $10,000 in court costs and legal fees, including the time and expense to fill an unexpected vacancy.
Keep in mind, if your rates are too low for your area and property, you might not attract your ideal tenant. If your rates are too high, you may have trouble placing tenants at all – and risk losing out on your monthly income. Your job as a landlord is to find the fair market rent sweet spot: not too high, but not too low.
Consider the average income of those who live in the location of your property. Your rental rate should target prospective renters with similar incomes so you can fill your space more quickly and don’t have worry about if you’ll get paid on time. (Pro-tip: Income Insights, a SmartMove tenant screening feature, helps to analyze prospective renter’s income by comparing their credit behavior with their self-reported income.)
2) It helps you cover your mortgage and other carrying costs
Your property is an investment; if you’re unable to cover all the expenses for your property from your rental income, then you haven’t set the right rent price.
3) It helps you maximize your rental profit
Setting the right rental price could mean maximizing profits; according to The Balance, landlords may be able to put zero to six percent of the rent in their pocket from their monthly rental income.
How Much Should I Charge for Rent?
It’s easy to see that setting the right rental rate is important, but figuring out what to charge tenants can be a bit more complex. There are an array of factors to consider before you narrow in on the right rental rate for your property.
1. KNOW YOUR COMPETITION
According to Apartment List’s national rent index, rent costs continue to rise yearly in almost all of the nation’s largest markets. This is good, “overall” information to be aware of and to have a general understanding that rents are rising in a good portion of the United States. However, before setting your rental rate, it’s important to take a look at what other landlords in your area are charging. According to Yardi Matrix, the national average rent in the United State was approximately 1,405 as of June 2018 compared to a median price of just $602 in the year 2000.
This average can vary greatly between different states and cities. For example, rental properties are likely to be at a premium in places like San Francisco and L.A., whereas smaller towns with less economic growth and job opportunities may be less desirable to prospective renters, therefore rent prices may be less competitive.
In order to determine what to charge for rent, you should look at the market comps in your immediate area. Learn what other landlords are charging for similar properties, and use this as your starting point. Then adjust the price of your rental based on what you uncover.
Another checkpoint is to look at fair market value estimations, which are updated every year by the United States Department of Housing and Urban Development (HUD).
When viewing what other landlords are charging in your area, be sure to note if rental units have similar features with your property such as size, neighborhood or location, and property condition. You can also utilize online tools like Rentometer to get quick snapshots of properties in your rental’s neighborhood for a more in-depth analysis.
Pro-Top: Keep an eye out for any rental properties that have shifted price in the last couple of weeks—you may find that you have to do the same in order to remain relevant in the rental market game.
2. THE 2% RULE IS JUST A GUIDELINE
Some landlords have heard about the 2% rule, which dictates monthly rent should be about 1-2% of the property’s value. But, keep in mind that this is just a quick heuristic to estimate your potential rent. It’s not a substitute for researching local comparable units and examining rents charged. Additionally, property prices have risen faster than rent prices in recent years, so this type of calculation could prove faulty.
3. SEASONALITY MATTERS
Seasonality can greatly affect rent prices. A pattern seen across the country is that the demand for rental property is highest during the spring and summer and tends to plateau during the winter seasons. This happens for a multitude of reasons, but mainly because it’s more inconvenient for renters to move during the colder months. Most people don’t want to uproot in the middle of a snowstorm or disrupt their children’s school year. According to Apartment List, 25 percent of renters who start their search in July will move in the next 30 days, whereas 22 percent more of renters who start in January will take more than 90 days to move.
Keep in mind, if there are fewer prospective renters looking to move during the winter season, then your rental property may stay vacant longer. Landlords might opt to offer a lower rent price during the winter season to avoid facing the risk of a vacant rental property. The big takeaway is this: listing your property during the winter season could impede your ability to charge your desired rental rate because of renter demand softness.
Tips on How to Get a Good Rent Estimate
Before you determine a rental price, do your due diligence and consider these additional tips:
- Tap into your network. Take advantage of BiggerPockets and other online forums to communicate with other landlords in your area.
- Look at rental property sites. Carefully comb sites such as Craigslist and Trulia to get an idea of the comps in the area. Also, look for rental ad copy ideas so you can write an effective ad that catches the attention of high-quality applicants.
- Consider the amount of interest in your property. If people aren’t applying or expressing interest in your rental, then this could be a sign that your rent is mispriced or is too high considering factors like property location, parking options, amenities offered, etc…
CONSIDER YOUR PROPERTY’S AMENITIES
While doing comparison research is important, it’s crucial to look at what the property has to offer.
For example, if you find a comparable property that’s similar in size to yours but it lacks an important feature or amenity, such as an in-unit washer and dryer, then you may be able to justify a higher price.
Here are some of the top amenities tenants look for in a rental property:
- Parking: The availability of parking is a huge bonus to many renters. Make sure to point out details such as if there is assigned parking, a spacious garage, or plentiful street parking.
- Security: Security is always a perk, as it can help to give the renter peace of mind about their overall safety. Be sure to mention information about any smart home technology or other security systems/personnel your rental may offer.
- Walkability: There’s a reason why “Location, location, location” is such a popular statement in the real estate world. Proximity to local goods and services can be a major differentiator for your unit. Having a desirable location can increase your unit’s attractiveness to renters, thus make it more valuable and give your leverage to price it at a premium compared to other units. If it’s close to desirable schools, restaurants, grocery, retail stores, or public transportation you could probably consider them as solid selling points and justify higher rental rates.
- Outdoor entertainment areas: An indoor or outdoor pool, patio or balcony, and recreation areas such as a tennis court or dog park are other great features that may help to draw in prospective renters.
Pro-tip: Be sure to highlight your most unique and favorable amenities or features within your rental listing. You may even consider highlighting one of them in the listings headline. No matter what, the last thing you want to do is lose a prospective renter simply because you forgot to mention the finest details.
Final Thoughts
Setting the right rental price is just one part of managing a successful rental business. To help avoid long-term vacancy, late rent payments, and unnecessary property damages, it’s crucial for landlords to utilize a tenant screening service like SmartMove.
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