Since rental income is the chief reason people consider buying investment properties, choosing the right rent amount requires a great deal of thought. But how do landlords decide what to charge?
Formerly, they spent weeks scanning newspaper ads for comparable rental units, and seeking advice from market experts. Now, though, anyone with internet access and a calculator can figure it out for themselves.
The two most important considerations in setting an appropriate rent amount are:
- Covering the cost* of owning the property
- Drawing a good pool of tenants
Set the rent too low, and you may come up short with expenses. You will also have an abundance of applicants, and difficulty narrowing the field. Set it too high, and you may have long vacancy periods. Also, the list of potential tenants may be very short and under-qualified.
There usually is a range of rent amounts, rather than one set number, that will meet your revenue needs and elicit a good field of tenant applicants. This range poses a challenge for many landlords.
Where do I start?
Numerous sites offer free rent estimator services. For instance, Rentometer.com allows you to plug in a city, or a specific address, and then delivers an average rent as well as median rent for comparable homes, or “comps.”
Zillow offers its Zestimate tool. Type in a zip code, click “Rent” and get a map of all available homes for rent in that area. Hover over a house on the map and see the monthly rent, number of bedrooms and baths, and the home's square footage.
To delve a bit deeper into comps, a landlord can visit the federal Housing and Urban Development (HUD) Fair Market Rent site. Although data on that site is used to set housing voucher amounts, even landlords who aren't enrolled in voucher program can view average rents. Rents are recorded by year. To view 2017 numbers, select your state and the county where your rental is located. Results offer typical rent amounts for efficiency units and units with one to four bedrooms.
SmartAsset offers a handy formula for setting a fair rent amount that is based on the market value of your investment property: “The amount of rent you charge your tenants should be a percentage of your home’s market value. Typically, the rents that landlords charge fall between 0.8 percent and 1.1 percent of the home’s value. For example, for a home valued at $250,000, a landlord could charge between $2,000 and $2,750 each month.”
Yet, SmartAsset notes, if the house is worth $100,000 or less, or is worth more than $350,000, the formula changes: “If your home is worth $100,000 or less, it’s best to charge rent that’s close to 1% of your home’s value. If your house is… (worth over $350,000) it’s a good idea to charge less rent so that you can attract more buyers. Charging rent that’s too high will make living in your house unaffordable for many people.”
SmartAsset recommends visiting Craigslist to see how your rent compares to rents for similar properties, so that you don't set it too high.
Once you have a good idea of typical rents for the neighborhood and the type of unit you plan to lease to tenants, track the rent amounts over several weeks or months to see if they go up or down.
How high can you go?
Landlords want to cover their immediate costs, and be able to set aside some of the income to offset major repairs and renovations. They also want to fix a price that includes any additional reasonable amount that the market will bear.
Your rental property's amenities will dictate whether you can make an extra bump in the rent. For example, if your unit is the only one in the neighborhood with off-street parking, you can probably hike the monthly rent by $10 or $20. If the view that your rental offers is superior to any other comps, then raise the rent a little higher than those other units.
The Balance warns owners of multi-units to avoid setting the same rent for all units.
“Do not set a standard price for all one bedrooms, or set a standard difference in price between one bedrooms and two bedrooms. Unless the units are exactly the same, this strategy will hurt you in the end. You should charge slightly different rents based on how desirable the unit is,” The Balance writes.
If you still struggle to come up with a rent amount, you can rely on one of the new rent data services to make recommendations for a fee.
For instance, landlords enrolled in Cozy can access RentRange, which supplies details on millions of investment properties, including estimates for current market rents. Realtors, who have access to a multitude of resources and can guide owners on rent increase limits set by individual cities, may help you set an appropriate rent for a fee.
In the end, you'll want to tap your landlord friends for tips. Ask them to share their experience with setting rent. Remember, if the rent is too low, you'll know when your voice mail floods with interested tenants. You'll know if it's too high if you receive only a couple calls – or none at all. Finally, if you don't get it right with the first lease, you can always change the rent at lease renewal time.
*Rent-controlled communities in such cities as New York, Boston and San Francisco limit rent and rent hikes so, in the short term, you may not be able to rely on rent alone to cover actual costs.