eTopical Precious Finds
Even the most seasoned property investors sometimes struggle to get the numbers to work. If you charge rent that’s too low, you’ll be sacrificing profitability, and potentially dealing with negative cash flow. If you charge rent that’s too high, people are going to be turned off and you’ll have a much harder time filling vacancies, ultimately impacting your profitability just as severely, if not more so.
The solution is to find the perfect price to charge for rent – one that’s as high as possible without turning too many tenants away. Easy, right?
Unfortunately, calculating the ideal price to charge for rent in a given property can be very challenging. But there are some strategies that can make it easier.
No matter what, you’ll need to consider many different factors in your rent calculation, and you’ll need to incorporate your own personal goals and perspectives into the equation.
Below, you’ll find some of the most important strategies and factors to consider.
Parameters for Optimal Rent
Any property with consistently positive cash flow can be considered a success, though obviously, the more profitable your property is on a monthly basis, the better. Math is going to look different in different areas; for example, if you have an excellent property in an area with tremendous growth, breaking even might be perfectly acceptable. But if you’re pessimistic about the area where your rental property resides, you might seek higher rent to justify keeping it.
Still, for most real estate investors, the perfect rent to target is one that turns away some tenants without restricting tenant application flow, and one that allows you to cover all your expenses with some money left over each month.
Work With the Pros
If you work with experienced property managers, you can take out most of the guesswork. These experienced professionals probably manage hundreds, or even thousands of units in your area, so they’re intimately familiar with the market prices and typical rent for properties like yours. They can also work with you to better understand your goals, your long-term strategy, and other special factors you want to include in the equation.
After setting a rent price, they can also help you market the property, screen tenants, and manage the property once occupied. For many property owners, they’re more than worth the money.
Ballpark It With the One Percent Rule
In real estate investing, the one percent rule is an informal rule that suggests a property is worth buying, or at least worth considering, if it can generate gross monthly rent of at least one percent of your purchase price. If you already have a property, you can reverse engineer a reasonable rent price by flipping this equation around. For example, if you have a property that’s worth $150,000, you should probably aim to get at least $1,500 a month in rent for it. Obviously, you’ll need to tinker with some of the variables here – but this can give you a good starting point.
Look Up Other Properties in the Area
Next, look up other properties in the area that are similar to yours. What are tenants currently paying for properties like yours in this neighborhood? The more data points you have, the more confident you can feel in charging a fair rent price. For example, if there are three properties very similar to yours charging $1,200, $1,300, and $1,350 for rent, you’d be perfectly reasonable to charge anywhere from $1,100 to $1,400 for your property.
Calculate the Square Footage
One of the most important factors that tenants consider when shopping for a new place to rent is square footage – and many property owners base their rent calculations on this variable. For example, in some areas, it’s common to charge approximately $1 per square foot of property; a 1,200-square-foot apartment could go for $1,200.
Factor in Amenities
After that, factor in any special amenities or unique factors that could adjust the value of this property higher or lower. For example, if the unit hasn’t been updated in decades, you should probably adjust the price lower. If the unit has a new kitchen and more bedrooms and bathrooms than comparable units, you can adjust the price higher.
Be Ready to Adjust
Even after your initial assessments, you should be prepared to make some adjustments. For example, if you list the property at a price of $1,800, but you have no tenant applications after several weeks, it could be a sign that you need to lower your expectations. For this reason, it often pays to start with a higher asking price and adjust down.
What If the Numbers Don’t Make Sense?
It’s possible that the market rent for this property, in this area, leads to a negative cash flow. For example, let’s say your monthly expenses are about $1,700 and your $1,800 rent isn’t attracting qualified tenant applicants. What do you do?
There are a few options here. You could sell the property. You could add new forms of value to justify a higher price (like free internet). Or you could bite the bullet if you feel the property has significant enough appreciation potential.
Calculating the “perfect” rent for a property isn’t easy, even if you have property management experience. But with help from experts and ample consideration of the variables, you should come to a reasonable, profitable price that tenants are willing to pay.
