How Much Rent To Charge? 5 Factors To Consider When Setting Residential Rent Prices

Are you getting a lot of applications within the first few days of advertising your rental? Maybe you’ve priced too low. Getting few or no applications? Rents may be priced too high. Don’t let this happen.

Whether single or multi-units, use these five factors to understand how to determine rent price for your rental properties and gain important rental price-setting experience:

1. Run Comps/Current Market Valuation

It helps to know the current market value for your residential investment property. Of course, running comps – short for comparative market analysis (CMA) – on rental rates for similar properties is one way to gauge value or you can get a value through a real estate appraiser. Expect to pay a fee for these services with the rent appraisal costing $400 and up.

Landlords often base rental amounts on 1 percent of a property’s valuation. For instance, if a property is valued at $250,000, the monthly rental amount would be $2,500. However, there are other factors that weigh into deciding a rental amount and the valuation method alone is not always the best choice.

In fact, it’s an outdated pricing method in many big cities due to runaway sales prices and rental rates. “The old 1 percent rule hasn’t been valid for quite some years in my area [of northwest Chicago],” notes veteran Realtor Lyn Simms of RE/MAX Suburban.

Certain units have little to compare them with and those are trickier to set a residential rent price for. While it’s fairly easy to price single-family homes, Broker Mott Marvin Kornicki of Waterway Realtors realizes that setting rents on “small multi-family and guest houses may require some leg work and knowing the market.” Look for similar properties for rent by driving around and checking rentals posted online.

Consulting with an experienced property manager for those hard-to-price units is invaluable, even when managing your own properties.

2. Understand Market Factors

Perhaps you got $1,500 a month for your rental last year, but the tenant has moved out, the market has taken a nosedive and you need a quick turnaround. Are you going to continue to charge $1,500? Probably not.

You want to set the rent at an amount that takes the current market into account. In that case, you’re going to charge a competitive rate to get a tenant fast even if the rent charged is less than your mortgage payment. Because sometimes it’s better to take a partial loss than to take a full loss with an empty unit. The market may turn around in a year and you can raise the rent (factoring in any rent control laws in your state, region, and/or municipality, which is discussed later in this article).

Plan ahead. Follow the movement of large companies in the area, as closure of one company can lead to an area’s economic decline and lower rents with higher vacancy rates. Conversely, addition of a megacompany into the region can decrease available rentals, boosting rents.

3. Know Monthly Expenses

Owning a rental property is a business endeavor. Property taxes, mortgage, insurance, homeowners’ association (HOA) fees, utilities, upgrades, repairs, and maintenance all come into play when deciding a rental price. Costly new kitchen appliances may have your books showing a loss now but can pay off later with increased rent and perhaps a lower vacancy rate. Analyze your financial reports – income and expenses – to make sure you are profitable in the long run.

4. Apprise Amenities

Off-street parking of any sort is a premium in some larger cities. U.S. Drivers spend 17 hours on average a year finding a parking space, according to USA Today. A permanent parking space – covered, uncovered, garage – along with other amenities – swimming pool, spa, patio, deck – can add value to the unit that may increase its rentability.

Proximity to parks, public transportation, shopping and entertainment is very important and both home and local amenities can make a tenant choose your rental over others like it. And they’ll pay a small premium for them. Certain school districts or neighborhoods are desirable and tenants will rent for top-dollar.

Debe Maxwell, Realtor at RE/MAX Executive-The Maxwell House Group, confirms, “If the property is in a particular school zone, we know tenants will likely pay more; walkable property will bring higher rates, and property near public transportation will as well.”

5. Consider Local or Legal Issues

Is your property in a 55+ or other deed-restricted community? Is there an HOA? Follow all local, state and national laws and HOA rules for rentals. For example, some HOAs only allow a certain percentage of rentals at any given time, prohibiting you for renting out your home when you want.

Other communities want to approve the tenant, while senior-living communities have age restrictions on who can live in the home. These restrictions can make it harder to find a tenant, and rent may need to be adjusted accordingly.

Cities such as New York and San Francisco have long had rent control, and now the entire state of Oregon has rent control laws in place. With escalating rental rates around the nation, more areas are looking into enacting rent control laws.

Know the laws in your area and, if applicable, price your unit knowing that you can only raise rent a certain amount the following year should the tenant renew their lease. Better yet, consider adding a renewal increase clause that specifies the second-year renewal rate to avoid questions later.

Setting Residential Rent Prices

An important part of your overall real estate investment strategy is setting residential rent prices. Correctly pricing your rental property generally leads to a decreased vacancy time and higher rate of return on your residential investment.