There are more than 20 million rental properties in the United States. That number is growing as more people purchase properties as an investment.
These are investors that rent homes to people, but the investment doesn’t always pay off. The reason why is because investors don’t set a reasonable rental price.
If they set the price too high, the unit sits empty. Set the price too low, and the unit doesn’t make a profit.
There’s an art and science to setting rental rates. Do you want to learn how to determine the rental price of a property?
Keep reading this guide to find out.
Signs You Don’t Have the Right Rental Rates
How can you tell if your rental rates need an adjustment? Look at the profitability of the unit.
Add up all of the costs to own and maintain the property, including maintenance, taxes, and mortgage payments. Then look at the income from the property.
You should have a return on investment of 6% to 12%.
Another telltale sign is tenant turnover. If tenant turnover is high, it’s probably because it’s not worth it for them to stay in the unit.
For instance, if you have a small one-bedroom apartment that is priced like a two-bedroom, it won’t stay filled. Tenants will want to find something better and less expensive.
You’re going to spend money to advertise the property, time to show it, and you’re going to do that at least once a year.
You’re much better off getting a good tenant who stays in the apartment for several years, even if the rent is slightly lower.
Research Comps in Your Area
How does the rental market compare in your area? Start by looking at comps in the area. Don’t compare a two-bedroom single-family house with a two-bedroom apartment.
Start by looking at other rentals in the same neighborhood. You’re probably well aware that rental rates vary from one side of your town to the other.
Compare rentals that have the same number of bedrooms and bathrooms. Consider the age of the building and type of construction (multi-family or single-family).
It’s easy enough to research rentals online. Check out sites like Facebook Marketplace, Zillow, Hotpads, Craigslist, and Trulia.
You could come up with a rental rate based on the square footage of the home. For instance, you might see that the average rental price is $2.50 per square foot.
Your Target Renter
Who is your ideal tenant? If you’re content to answer with, “anyone that pays rent on time,” you might get more than you ask for.
A renter could pay rent on time each month but have other issues. They could be high-maintenance or have parties often.
You might want to attract professional renters who want a quiet place to rent and are willing to pay a little more for it.
That would mean you have to offer a great place to live, but it also allows you to price your rental a little higher as well.
Rental Amenities
In your comps, you might have noticed a trend in rental prices. You probably have an idea as to what you can rent for.
Look at the amenities that your rental has. It could help you decide the price of the rental. For instance, parking is a big win for tenants.
Recent renovations could help you get a higher rental rate. A rental close to public transportation or is highly walkable is in demand, so you can charge more rent.
The view of the rental, storage, layout, and floor level needs to be considered as well.
The Current Rental Market
The current rental market is insane at the moment. Demand for rental units remains high, while inventory remains low. The average rental increase hit 13.5% last year.
That doesn’t mean you should list your rental at 13% above your initial projections. Take the other items into consideration as well.
Keep in mind that the market changes often. Right now, it’s a great time to own a rental.
That could change if the economy takes a hit or inflation rises more. You don’t want to overprice your rental to the point where people can’t afford it.
Don’t be afraid to lower your price and adjust based on the economy.
Know Housing Laws
States and municipalities have housing laws to try to keep housing affordable for everyone. They might cap rental increases to a certain percentage.
If you have a new tenant on a new lease, there isn’t a cap on what the previous tenant paid. However, if you’re raising the rent on a current tenant, you can only raise the rent so much.
Check with a real estate attorney or property management company to make sure you stay within fair housing laws.
Work With Experts
Investors buy rental properties because they want to have passive income. Look at all of the work involved in just setting rental rates.
You then have to list the rental, screen tenants, handle repairs, and pay taxes on the property. There are landlord-tenant laws to learn and more work than you want to do.
If you want to ensure you have the right rental rates and you can enjoy your passive income stream, then hire a property management company.
Reedy and Company is an example of a property management company that works with investors to improve the value of the property.
Set the Right Rental Rates
One of the many challenges of owning a rental property is setting the right rental rates. Set a low price, and you won’t see profits. Too high, and the unit sits empty.
This guide showed you what to consider when setting rental rates. Use it to your advantage and be flexible as the market changes.
For more buzz about the real estate market, check out the other articles on the blog.
