Best Practices for Calculating Rental Rates

Whether you’re a first-time landlord or an experienced pro trying out new locations or property types, deciding on how much to charge for rent can be one of the most difficult parts of the rental process. However, it’s also one of the most important decisions you can make for your business because the cost of rent will determine your profit, vacancy periods, tenant quality, and other vital factors.

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One of the most challenging things about determining how much to charge is that it requires a balance; if you set the rent too high compared to similar units in the area, you may have trouble finding a reliable long-term tenant. On the flip side, setting the rent too low will hurt your bottom line. Although it might be tempting to look at nearby properties and choose a comparable rental rate, it’s better to take a more strategic approach. Read on to learn more about best practices for finding the sweet spot for your rental rates.

Why is it Important to Charge an Appropriate Amount of Rent?

Why is it so important to make sure you’re charging the right amount of rent for the area and type of property?

  • It helps you place the right tenants and get paid on time.
  • It helps you cover your mortgage and other expenses.
  • It helps you maximize your rental profit.

Keep in mind that if your property is subject to rent control laws, the amount you charge may be regulated. Do some research on rent control laws in your area before deciding on the amount of rent you’ll charge.

5 Important Factors for Calculating Rent

When determining rental rates, use the following four factors to analyze your property:

  1. Property Value

Often, the property value is the best place to start when trying to set a rental rate. Typically, a property’s rent is between 0.8% and 1.1% of the value of the property. So, if you have a home valued at $300,000, you could charge anywhere between $2,400 to $3,300 a month.

This tactic applies only to the actual price range of your property. If your property’s value is under $100,000, you should be able to charge 1% of its value for rent in most markets. If you have a home that has a value of $375,000 or more, it’s best to keep your rent on the lower side so your property generates enough interest from good tenants.

  1. Local Rent Rates

When determining rental rates, many landlords research what other landlords in the area are charging. This can give you a baseline to work with, but be sure to compare the rental costs of similar types of properties. The rent for a studio apartment, for example, shouldn’t be the same as the rent for a three-bedroom single-family home. As previously mentioned, you don’t want to charge too much or too little, as either can have consequences for your business.

Use the following characteristics to determine a good balance for your property:

  • Lot size
  • The year the home was built
  • The year the home was most recently remodeled
  • Number of bedrooms
  • Number of bathrooms
  • The property’s amenities

Once you’ve determined a good price range for your property, you may want to consider reaching out to a property management company or a few real estate agents to find out if the price is reasonable.

  1. What’s the demand for rentals in your area?

Another factor that can affect the rental value of your property is demand, which can have both positive and negative effects. Some common examples of demand include:

  • When the economy is doing poorly, the demand for rentals tends to increase because fewer people can afford to buy a home. Smaller apartments are also likely to be more in demand.
  • Before the school year, larger rentals are often in higher demand because many families relocate before the next school year begins.
  • Winter weather can make moving difficult, so there is typically less demand for rentals during that time of year.

In general, the lower the demand, the lower the rent will need to be to attract tenants. The higher the demand, the more competitive your rental will be—and you’ll be able to charge accordingly.

  1. How Much Do You Need to Cover Your Expenses?

In addition to the above factors, you’ll also want to look at how much money you need to cover your expenses. Some expenses you should pay close attention to include:

  • Mortgage payments
  • HOA fees
  • Taxes
  • Maintenance costs
  • Cost of vacancy periods
  • Property management costs

After adding up these expenses, you’ll also need to make sure that the rental amount will make you some profit each month, too! Use the following formula to calculate your total profit left over after expenses:

Rent amount – total expenses = profit

If you’re left with a negative amount or little profit, you’ll need to consider slightly increasing your rental rate.

  1. Amenities

All amenities affect your property’s rental value, but some amenities can significantly boost the price tenants are willing to pay. The following amenities have a high value and can justify a 3-15% increase to your rent:

  • Washers and dryers
  • Dishwashers
  • Swimming pools
  • On-site parking
  • Security
  • Recreational areas, like a tennis court or dog park

However, these amenities also create additional maintenance costs. Paying attention to the effect of these types of amenities on your expenses is essential when you can’t find comparable properties that have the exact same ones—so be sure to stay aware of any differences and price your property accordingly.

Setting the right price for your rent is just one part of managing a successful rental business. Once you’ve figured out how much to charge, the next step is finding the right tenants for your property. Using tenant screening services from TSCI can help you avoid long-term vacancies, late rent payments, and unnecessary property damage. Available online 24/7, our reports enable you to make faster, more well-informed decisions about applicants. Order your reports today!

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