How Much Rent to Charge

Determine How Much to Charge for Rent on Investment & Income Property

Setting a rent price is often a difficult decision. You want to maximize profits without scaring away renters to less expensive rival properties. There are a few reasons why you should spend extra time evaluating the amount to charge for rent on your investment property. It can really impact you in the long run - both in your vacancy rate and your ability to cover costs and generate a return on your investment. Once you have established the amount to charge, it's wise to periodically re-evaluate your price because of various market forces.

The more experience you have at renting properties, the better idea you will have at maximizing your income without having frequent or unnecessary vacancies. A common mistake for landlords to make is to be unsure of the amount to charge for rent and subsequently ask the tenant what they think the fair amount of rent is - even though the rent can eventually be increased, you run the risk of cutting profits by using this method versus establishing an optimum amount of rent to charge based on proven techniques that you can accomplish entirely on your own.

Classically, there are two main methods behind determining how much rent to charge for investment and rental property, the first being return on investment, and the second being market analysis. Let's explore both of these techniques in more detail.

 

Using Return on Investment to Calculate Rent

If you plan to follow the return on investment model for setting rent prices, you first need to determine the costs of owning and operating your rental property. Items to consider here are the costs for carrying your mortgage, management company fees (if applicable), rental property insurance, maintenance fees for all seasons, and the amount of profit you desire from the property as a whole. If you're looking for a "how much rent to charge calculator", this is the approach that you want.

Looking at a simple example should provide you with some guidance here.

 
Annual expenses: $10,000 (mortgage)
Annual Operating Expenses: $2,000 (management company fees, insurance, maintenance)

Desired rate of return on $30,000 investment: $3,000 (10% return)
Annual Rent: $15,000 (Annual Expenses + Annual Operating Expenses + Desired Return)
Monthly Rent: $1,250 (Annual Rent divided by 12)

In this example, given the information around annual expenses, as well as our desired profit margin, you would need to charge $1,250 per month for rent to generate a 10% return on investment.

 

Using Market Analysis to Calculate How Much Rent to Charge

Calculating how much to charge for rent based upon return on investment is a great mathematical exercise, and it puts fences around desired rent levels, but it is also very important to take into consideration what the market will bear. Figuring out return on investment is something that you do in your home office, while calculating rent based on market analysis is getting out and pounding the pavement.

Typically, the ideal way to determine how much to charge for rent on your investment properties is to combine your return on investment analysis with a market survey of comparable rental properties in your area – the word comparable is key here, keep in mind that rent can vary significantly from street to street within a single city or neighborhood, and you need to take this into consideration when adjusting rent.

It’s up to you make unbiased adjustments to your rent based upon rival properties in the area (i.e. if we’re looking at similar properties, and other properties have parking, while your property does not, be realistic in know that on a head-to-head feature comparison, you need to adjust your rent down slightly vis-à-vis your rivals).

After you determine which rental properties are comparable, finding out the current market rent is easy. Local papers and Craigslist are a great way to get general information about the market, although simply looking at ads might not allow you to determine if a property is a true comparable, you should make an appointment, and see the property in person. Putting yourself in the shoes of the potential renter can be a smart move. Be one step ahead of them by knowing about surrounding monthly property rents. This way you can charge an optimum amount that is within an acceptable range.

Evaluating how much rent is being charged for similar rental properties in comparable locations is a great way to gather information before locking in on your monthly rent prices. Ensure that you are basing your rent off what the market is saying "yes" to, meaning, look at actual rental prices on units that renters have agreed to versus basing your decision of how much rent to charge on original rental list prices (which may or may not accurately reflect what the market will bear). This concept is similar to a sales price to original list price ratio that you see in listing property for sale.

 

How Much to Charge for Rent

If you follow these steps in combining both the return on investment and market analysis techniques, you put yourself in a good position to find the correct answer to that elusive question of "how much rent can I charge?" for an investment property.