When you're ready to list your rental on the market, one of the first decisions you need to make is how much to charge for rent. You don't want to undercharge and lead yourself to financial ruins. But, you don't want to overcharge and deal with high vacancy and turnover rates. When determining how much to charge for rent on your investment property, follow these 5 rules of thumb.
How Much Should I Charge for Rent?
1. Assess the market.
When you're ready to list your rental property, start by assessing the current market. What types of rentals are available in your area? Do similar homes come with appliances and granite counters? Is water and trash included in the rent amount? Are the carpet, paint, and cabinets new or worn? These are all things that potential renters will be considering when choosing a home in your neighborhood.
Start by evaluating at least 3 rentals in your neighborhood that are comparable in square footage. Make a checklist to assess each of the following (you may consider making an appointment to see inside!):
- Number of bedrooms and bathrooms
- Is water, sewage, and trash included in the price?
- Kitchen Appliances (are they high end or standard, new or old?)
- Counters (granite, tile, laminate, ect)
- Paint Condition (new, worn, old)
- Carpet and Flooring (new, good condition, light stains, old)
- Yard (maintained and vibrant, dead lawn, water features, pool, ect)
- Location, view, quality of surrounding properties, ect.
Now that you have an idea of the current rental market, let's talk price.
2. Do some rent comps.
We'd all like to charge the top dollar for our rentals, but being realistic about what your property has to offer will ensure you set the rent appropriately, which will help it rent faster.
Start by comparing each rental side-by-side. How much is the rent on each of the properties you evaluated in step one? Within that rent range, how does each home's condition, location, and features affect the price? Given the condition of your rental, where does it fall within this list?
Many variables will change how you rank your property, but this scale should give you a good starting point.
3. Assess your expenses.
Now that you've determined the possible range you can charge for rent, you'll want to assess how much you need to cover your expenses. Add up your mortgage, tax, and other reoccurring expenses to determine how much money you need to cover the bills for your property.
If your monthly expenses exceed the fair market value of your rental, you may consider taking a bit of a loss to avoid long term vacancies. For example, if you price your rental at $1,200 / month in an attempt to "break even" on your expenses, you will loose money when the rental sits vacant for more than 30 days. Instead, try dropping the rent by $100 / month to rent it faster.
4. Make small improvements to raise the value.
After assessing the competition, you may consider making some small improvements to raise the value of your rental. When renters are looking for a new home, they generally want fresh paint, well maintained carpet, and upgraded appliances. Making a few changes can go a long way. Here are some relatively inexpensive ways to boost the value of your rental for perspective tenants.
- Replace the carpet
- Update the counters
- Give the home fresh paint
- Plant some flowers
- Invest in deep, heavy clean
5. Plan ahead.
Don't just set your rent and forget! When your tenants are in place, start to plan for the future. Here are a couple ideas that will help you raise your rental profits:
- Plan an upgrade. Save an extra $100 - $200 / month until the current tenants vacate. Then, plan to do some upgrades next time around. This will allow you to raise the rent and increase the value of your property.
- Plan a rent increase. When your tenants renew their lease (or after 12 months on a month to month lease), increase the rent by 5-10%. Be sure to check with local laws and your lease conditions before issuing a rent increase.