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Choosing the appropriate rent rate is a balancing act.
You want your rent to be high enough to cover your mortgage payments, property taxes, and business expenses. With that being said, you don’t want to price your rent too high to where renters aren’t interested in your property, leaving you with an unwanted vacancy.
As a new landlord, figuring out your rent pricing can be a completely foreign process. In order to set the right rent rate, you must not only understand what factors influence the price of rent, but you must also be familiar with your current real estate market.
Here’s how you should decide how high your rent should be in today’s market.
What Factors Influence Rent Rate?
Several components factor into a property’s rent rate. Things to consider are:
- Square footage
- Type of property (apartment, condominium, single-family home, etc.)
- Number of bedrooms and bathrooms
- Amenities (what utilities are included, additional facilities, etc.)
- Miscellaneous features
Once you know what factors influence rent rate, it’s time to research properties in your area that are similar to your own property. Listing sites are a great place to find information about properties in your area. Browse Appartments.com, Zillow Rental Marketplace, Trulia, Craigslist, Facebook Marketplace, and other sites to find properties in your area that are comparable to yours.
As you find properties, organize them on a spreadsheet. Each property on your spreadsheet should include the street address, rent rate, and information on each of the features that were listed above (square footage, number of beds/baths, amenities, features, etc.).
Once you’ve compiled a list of properties, you’ll use it to help determine your own property’s rent rate by reverse engineering. This involves asking yourself how each landlord decided on the rent rate for their property.
Think of it this way: each component of a property adds a certain amount of value to it, which influences how high the rent is. By comparing all the properties on your list and considering each of their features, you can estimate how much each feature is worth in today’s rental market.
For example, if a property includes water, gas, and trash in its rent rate, and this property is $100 more than similar properties that don’t include these utilities in the rent, then you can estimate that water, gas, and trash add a value of $100 to the property. This can be applied to square footage, laundry facilities, smart technology, and other features. When you notice a trend, you can expect to increase your rent rate by the appropriate amount.
Identifying Rent Tiers
It’s also a good idea to organize local properties by rent tiers. Do your best to categorize each property into a tier based on its price per square foot. Within each tier, you should also order each property based on the features and amenities it offers.
When you’ve finished categorizing the properties, place your own property where it belongs on the tier list. Does the rent rate you had in mind for your property match its placement on the tier list? If the rent rate you came up with is too far above or below the average rent price for your property’s tier, you should adjust your rent rate accordingly so that your property remains both competitive and reasonable.
Rent to Value
Finally, you should consider your property’s rent to value ratio. This is calculated by dividing your rent rate by your property’s cost basis, or total value. The higher the rent to value ratio, the higher your cash flow. A ratio threshold of 1% is considered ideal by most investors.
Deciding how high your rent should be isn’t such a simple decision. A lot of research and considerations go into picking your property’s rent rate. It’s all about finding a rent rate that’s not too low or high. If you’re struggling to determine your rent rate, try reaching out to local landlords and realtors who can tell you what they’ve learned about rental rates in your market.