How Much Should You Charge For Rent?
There isn’t a standard rule on how much to charge for rent when leasing your rental property. For most, the monthly cost of rent is finding the balance between expenses and income and choosing rates that are competitive for your area and amenities. Balancing all of these priorities requires both guidance and research so you can learn the rental rates for your market and decide how much to charge for rent.
The following tips are designed to help you decide how much to charge for rent to get the best return on investment.
Know your neighborhood
A studio apartment will have a significantly different price in San Francisco compared to Rapid City, SD. Understanding what similar units are renting for in your area will help you set a price range. One of the easiest ways to do this is by exploring pricing through different tracking websites available online.
- Rentometer offers specific rental pricing by zip code. You can use this tool to find a market comparison.
- Fair Housing Guidelines let you know the price of rentals that are considered fair market price by HUD and other housing support providers. It’s especially important to stay within this range if you plan to accept Section 8 vouchers.
Know your mortgage
You’ll need to know how much you owe monthly as a landlord before deciding how much to charge for rent. If you have a high mortgage payment, you’ll need to make sure the cost is covered within the monthly rental price that you set. Additionally, you’ll need enough money in savings to cover basic maintenance and emergency repairs, as well as any licensing or operational fees that may exist in your area. One formula many landlords use to determine this amount is called the 2% rule.
The 2% rule was created with the idea that "monthly rent should be equal to or higher than 2% of the purchase price." So, if a property was sold for $100,000, the rent should be at least $2,000 per month. While this rule has been around for a long time, it's generally not held in high regard. The rule is especially troublesome for lower purchase points. For example, if a property was purchased on a short sale for $50,000, it might not be in rentable condition for $1,000 per month. More realistically, this property could need $150,000 worth of work to be liveable for at least $2,000.
Know your demand
Just because you have the perfect price and the perfect property doesn’t mean there are in-market renters in your neighborhood. Know the demand for rentals when deciding how much to charge for rent. If you live in an area with low demand for renting, consider offering incentives to potential tenants such as breaking up security deposits into several payments over time or offering a discount on the first month’s rent.
You may also consider offering different lease terms for long-term renters over month-to-month tenants. By making your property desirable for tenants to stay long-term, you can reduce costly tenant turnover. A single month without a tenant can cost you rental income, HOA fees, cleaning & repair and administration costs while vetting new renters. The costs add up quickly.
Know your amenities
Property amenities are a great way to entice renters to rent your rental home and motivate them to live there longer. In many cases, they may also allow you to increase your monthly rental price. Amenities include items on your property like a pool or two-car garage. They can also include closeby areas within a short distance of your rental such as access to public transit, biking trails, proximity to good schools and walking distance to restaurants. Make sure to list all of the amenities your rental offers in your rental listing. You may also be able to ask for a higher monthly rental price if your property is in a prime location.
Know your home, area, finances and the rental economy when determining how much to charge for rent. A little research now can save you significant hassles in the future and set you on a path to generating strong investment property income.