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 the price because of market fluctuations and the like.
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 is to be unsure of the amount to charge and ask the tenant what they think the fair amount is. Even though the rent can eventually be increased, you will still cut profits by using this method versus deciding on a high, but reasonable, amount on your own.
Classically, there are two main methods behind determining how much rent to charge for your rental property, the first being return on investment, and the second being market analysis.
| 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), insurance on your property, maintenance fees for all seasons, and the amount of profit you want to pull in from the property as a whole. Looking at a simple example should provide you with some guidance here. |
Typically, the ideal way to determine how much to charge for rent 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, and you need to take this into consideration when adjusting your rent accordingly. 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. 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 you have parking, while your competitor does not, you may be able to charge more for rent).
After you determine which rental properties are comparable, finding out the current market rent is easy. Local papers is a great way to get general information about the market, although responding to an ad might not allow you to determine if the 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.