There are several websites and online apps like TurboTax and Zillow that will tell you the “average” rent you should charge for your property. However, as an independent rental property owner, it is important to understand the key to rental success.
Why Is It So Important to Charge an Appropriate Rent?
Before we get into the discussion on how much you should charge for rent or what factors would determine how much you should charge for rent, let’s first briefly analyze why it is important to ensure that you are charging the right rental price.
Your Rental Property Will Not Remain Vacant
Ideally, every landlord expects at least a 95 % occupancy rate for their rental property. Realistically, that will not always be the case. However, rental vacancy, especially in the long term, is a real nightmare for any real estate investor. One of the best ways to avoid rental vacancy is to make sure you charge the right price.
As a landlord, you may want to charge high rent to make a lot of money –that’s how most landlords are– but there’ll be no rental income if you can’t attract any tenants. Keep in mind that as long as your rent is high, chances are your house might sit unoccupied.
You’ll Be Paid on Time
When the rental rates for your property are neither too low nor too high, you might attract the ideal tenant; and an ideal tenant refers to someone with a decent credit score, a decent rental history and a decent work history.
When you’ve considered the average income of those who live in the neighborhood of your property and you’ve set the rates for your property based on this, the prospective tenants with similar incomes that you’ve targeted are most likely to pay rent on time.
You Can Cover Expenses
Your rental property is first an investment, not a money-making device; this means that you need to recover all the expenses you’ve made for your property from the rental income. However, if you are unable to do so, it means you haven’t set the right rental price.
How to Calculate Your Rental Rate?
Although there are several constructive strategies to calculate rent, there is a general rule of thumb that says that rent should always be about 1-2 % of the property’s value. Using this estimate, if a house is worth $ 500, 000, for example, the 1-2 % rule would say that the monthly rent should be $ 5, 000 or $ 10, 000. However, even if the national price for rent differs between countries, it is always significantly lower than the rate calculated by the 1-2 % rule. In America, for example, the average renter might pay $ 1, 326 a month, with single-family houses averaging now $2, 018.
Perhaps, a more realistic range may be between 0.5 % to 0.9 %, depending, of course, on the location of your property, the type of house you are renting, the amenities and the current rental market and current trends. For instance, the rent for a one-bedroom in Kansas might be just $ 500 a month, but the price of a similar apartment available for rent in New York may range from $ 2,000- $3,000 per month.
Factors That Decide How Much You Should Charge for Rent
Look at the Competition and Market Trends
Sometimes, the rent you are charging has absolutely nothing to do with the value of the house but has everything to do with demand and comparable properties in your area. If you want to figure out how much is a fair price to charge for rent, you need to gather information about the state of the rental market in your area. The real estate market in Phoenix or Austin, for example, is very hot and trendy right now because these areas have exhibited an exemplary economic growth. On the other hand, small towns with fewer job opportunities and less economic development will be seen as less desirable to prospective tenants and hence, rent prices are most likely to be less competitive.
As a rental property owner, you need to look at what other owners in your neighborhood are charging. What other landlords are getting in rent for a place similar to yours is what sets your price. Otherwise, your place would remain vacant.
There are several other checkpoints that decide how much a landlord should charge for rent and if you want to learn more, stay tuned for part 2!
