Figuring out how much rent to charge can be one of a landlord’s trickiest responsibilities to deal with. Many factors can influence a landlord’s decision about how much to charge for rent, and an unreasonable rent amount can lead to difficulty finding tenants or issues surrounding rent collection each month.
On the flip side, charging just the right amount of rent that’s fair for your tenants and profitable for you can make your job as a landlord both more lucrative and easier to maintain over time.
Things to Consider When Deciding How Much to Charge for Rent
Let’s take a closer look at some of the most important factors to consider as you’re deciding how much to charge for rent. Keep in mind that the amount you choose may change over time for a variety of reasons.
Market Pricing on Your Property’s Features
If you’re unsure where to start with setting rent, a great place to begin is with a detailed assessment of all of your property’s assets and their current market rate.
How many bedrooms and bathrooms does your property have? What is the square footage? How old is it? Are there any unique features that give it a higher value than similar properties in the area?
You can create a rental market analysis or RMA using this information. This analysis will allow you to determine a fair estimate of how much to charge for rent based on properties similar to yours located within the same general area.
It’s good to understand the value of your property’s basic features, such as size, age, and the number of bedrooms and bathrooms. However, even rental properties that are technically similar in these simple ways may differ dramatically in the types of amenities they offer to tenants.
Some of the most obvious amenities to factor into your rent price are access to common spaces, guaranteed parking spaces, and gated protection, which are often included in apartment and condo buildings.
However, suppose your rental property is a freestanding home — not included in a gated neighborhood or building. In that case, your amenities could include great views, multiple stories instead of just one, and a lot of storage space.
Your Expenses as a Landlord
Owning and overseeing a property is a source of income for landlords, but in order to see that income, they have to put their own time and money into the property to make it livable and desirable for tenants. Some typical landlord expenses include:
As you’re figuring out how much rent to charge, make sure that your expenses are covered. Then, you can add on a few percentage points to make sure that you’re receiving your earned monthly income for your work. Research what percentage of rent landlords are taking as income in your area to determine a fair cut.
The capitalization rate, or the cap rate, is the expected rate of return on investment that specific properties will produce.
You’ll have a very sturdy figure once you calculate your property’s cap rate using metrics like property maintenance and management expenses, the original purchase price, and your gross and net income as the owner. Use this number to decide how much to charge for rent and be ready to explain it to potential tenants if need be.
The 1% Rule
The 1% Rule, also sometimes referred to as the 2% Rule, is a general guideline that suggests a rental price of 1-2% of the property’s purchase price.
Any major repairs or maintenance costs can be deducted and the value of desirable amenities added to the final total, but this provides a base figure to work off when deciding how much rent to charge.
Seasonal Increase of Potential Renters
Did you know that demand for rental properties can increase or decrease depending on the time of year? The seasonal shifts in the rental market should definitely play a role as you determine how much rent to charge.
You’ll likely have an easier time securing tenants with a higher rent price during the spring and summer — when demand is high — instead of the winter, when moving homes is less convenient.