A Step-by-Step Pricing Process
It can be tempting to price your rental aspirationally – coming up with a profit that you’d like to make and pricing it based on that. Unfortunately, the process for how to price your rental property is more complicated and needs to factor in many specifics related to your property and local market conditions.
Avoid the temptation of being arbitrary or aspirational and instead follow this 4-step process to price your rental property.
Step 1: Calculate Your Baseline Rent
While it’s not a good idea to set rent based on a certain profit margin that you’d like to get, it is important to make sure that rent, at a minimum, covers your monthly expenses. Before coming up with a rental price, it’s important to know the monthly costs of each rental property. This includes mortgage payments, insurance, taxes, vacancy costs, and an estimate for maintenance and repairs. As a rule, it’s a good idea to anticipate maintenance expenses of around 1-2% of the property’s value every year.
Once you know the monthly expenses for your property, you know the minimum value of rent that you can accept.
Step 2: Look at Comparable Rental Prices
The next step is looking at how comparable rental properties are priced. When doing this, the key is focusing on other rentals that are as similar to your property as possible. This means focusing on:
- Location – even within cities, rental prices can vary widely from one neighborhood to another, so it’s important to look at properties in the same area as your rental.
- Size – it’s important to price your property based on others that have similar square footage and the same number of bedrooms and bathrooms.
- Type of Property – single-family homes generally produce higher rent than multi-family units so it’s best to compare to the same type of home.
- Age of the property – new construction usually means a higher rent value, so it’s important to pay attention to the age of the property when making comparisons.
Online tools, like Zillow, are a good place to start to find comparable rental properties. Realtors can also serve as a reference point to help find other rental listings in your area.
Step 3: Adjust Your Price Based on Amenities
Once you know what comparable rental prices are, it’s a good idea to adjust that number based on the specifics of your property. Factors like the property’s updates, view, square footage, floor level, storage, and outdoor space all can factor into setting the right price. Small adjustments up or down based on your property’s amenities will ensure you hit the right number.
Step 4: Check Your Pricing
Once you’ve come up with a rental price for your unit, it’s a good idea to do some additional research to see how well you’ve priced it. Using online tools, like Zillow’s Rental Zestimate, can be a good way to make sure you’re in the right price range.
Additionally, pay close attention to market changes. Demand and economic factors have been volatile in the last year, so it’s important to ensure that your pricing stays up to date with market conditions.
Finally, once you’re comfortable that you’ve priced it correctly and are ready to list, continue to be vigilant. If you aren’t getting viewing requests, it might mean that you’ve priced it too high and need to make an adjustment.
The Current State of Rental Markets
As you price your rental, it’s important to keep in mind how unpredictable the last year has been, as the COVID-19 pandemic has disrupted rental prices around the country. This means that now, more than ever, it’s important to stay up to date on market trends.
A good resource to help with this is Apartment Guide’s March 2021 in-depth look at rental prices. Here are a few takeaways from the report:
- Two-bedroom apartments are the only size unit to see both month-over-month and year-over-year growth. Also, they’re the only size unit seeing rent increases in every region in the country.
- While national rental averages are down, a majority of states are seeing rental prices go up.
- The average rental price in the United States in February of 2021 was $1,861, compared to $1,766 in 2020 and $1,865 in 2019.
- While major cities have seen decreased demand and prices go down in the last year, they continue to be the areas with the highest rental prices – the highest-priced cities for one-bedrooms are Boston, San Francisco, and New York; and the highest-priced cities for two-bedrooms are New York, Boston, and Los Angeles.
The report shows good insights as to how different regions are responding to and recovering from the pandemic, and it’s worth spending some time reviewing it to better understand rental prices in your area.
Once you’ve priced your rental, visit ezLandlordForms.com for all the tools you need to screen applicants and select a great Tenant.