When you invest in real estate, part of how you’ll recoup your investment and boost your profits lies in the tenants that live on your rental property. You want to charge them a reasonable rate that fits with the market value of the area or else they will look for another place to live.
Charging too little might mean you don’t make back what you need to on the market value. But charging too much means you’ll encounter vacancies which will wind up costing you money.
So, how much should you charge for a rental property?
It all depends on the market value of your home and should be a percentage of that value. Depending on the real estate market the property is in, the location, and the amenities of this property, landlords typically will charge between 0.7% and 1.1% of the property’s value.
Yes, I know that’s a bit vague, but we’ll get into more detail further down so keep reading. You’ll find out how to estimate rent and what factors can allow for the rent to be higher.
How to estimate rent?
When you’re new to real estate investment, figuring out how much to charge your tenants every month is a very crucial step. You can’t just pick a random number that sounds good to you. For one, it could be too low and then you’re not generating enough passive income as you should be for your investment. For another, it could be too high and be unreasonable to the point where your property stays vacant, not earning you a dime. Read on to avoid either of those rookie mistakes when estimating rent!
– Compare the average rents in your area
The prices of rentals are going to vary from area to area. In one part of the country, the rents could be far less while in other areas. Take London for example. In July of 2018, the average rent in Greater London was 1615 British pounds ($1,985 USD). In the North East of England though, the average was just 525 British pounds ($645 USD) during the same time period. The difference is huge!
So you have to go with the rents that are in your area for in this example, if you were in the North East of England and tried to charge as much as the average rent in Greater London, it would be too extreme.
This is why I recommend whether you’re in England, the US, or anywhere really, you should learn about the average rent costs in your particular area. To do otherwise would be comparing apples to oranges, and you’ve got to keep apples to apples to be successful.
OpenRent has a rent calculator that allows for comparing rent instantly online for UK properties. In the US, there’s RentOMeter and plenty of others too. These can be very handy when trying to calculate the average rent for where your property is located.
Typically, you’ll have to input a few things to help the system out. After all, if your property has 3 bedrooms and you’re comparing it to properties with just 1 bedroom, it doesn’t help very much.
Details that you’ll likely need for your property include:
- Zip or postal code
- House or apartment number
- Type of property
- Number of bedrooms
- Number of bathrooms
You’ll get an estimated rental value in an estimated range which should give you a jumping-off point. Though there is much more to this story so keep on reading. I’d hate for you to miss out on how to fully maximize the rent potential for your investment property!
– Ask a local real estate agent or a property manager
Something else you can (and should!) do to learn more about the rental averages for your area is to inquire with a local real estate agent. Even a property manager can give you a quotation.
With real estate agents, most of them will happily provide a quote without obligation. They generally have the best knowledge in their area for the rental prices. It’s their job.
It really might help to go to an event and meet a few real estate agents, or ask friends for recommendations. Then again, if you’ve got your real estate license yourself (you can read about how that benefits you here), you might already have the inside scoop. Even if you do though, it never hurts to get a few opinions to compare.
If a real estate agent is really worth their salt, they’ll stand firm in the middle. What I mean by this is that they won’t tell you to lower prices for the sake of tenants (unless you have some outlandishly high idea for the rent that is) nor will they try to give you pretenses about charging higher rents to profit like Scrooge. Ideally, before you speak with other real estate agents, you should make sure you’ve taken the first step and looked into the average rental prices in your area first.
What are the questions you should ask your real estate agent? You can’t just go in there with your average rental prices for the location in question. You need to be ready to gather more information. What you should be asking is:
- How does my property compare with properties that are similar?
- Do you have any examples of successes with selling properties like mine?
- How long could it take to rent out my property?
- Can you show me details for your reasoning on rent quotations?
Getting this information can bring you that much closer to renting out your property and bringing in passive income that finances your future.
Use the 1% Rule to get a Ballpark Estimate of the Right Market Rent
As you probably knew when you invested in your property, being a rental property owner can create plenty of passive income. When making that investment, hopefully, you used the 1% rule to help you narrow down your possibilities (and if you have yet to make your investment, please go here and read everything you need to know about the 1% rule for real estate for your best advantage!).
You can also use that 1% rule to help you figure out how much rent to charge. Basically, if the rent you charge amounts to less than 1% of the total cost of that property, it will take too long for you to make money off of it. You have to think about all those little (and big!) additional costs that are going to stack up over the years plus you have to pay back the initial cost. Charging anything less than 1% of that property’s worth could take years and years to really pay off and I don’t recommend it.
As usual, I’d love to illustrate that point in numbers.
Say your property costs $205,000 and the rent is $2,000. There’s always a bit of an error that changes with the tides. Rent is merely an approximation. Something that goes for $2,000 is generally in a broader range of something like $1,900 to $2,100. Factors that can affect it to be at the upper or lower portion of that range can be the lease term, the season, or a number of other things.
Rent is always a range. Even at $2,000 a month, the GRM (Gross Rent Multiplier) is 102.5 rather than 100 but it won’t demolish your returns. However, if that same property were to rent for $1,400, that’s a bad deal and not worthy of your time.
Renters themselves can look at this inversely. If they look at rentals to see how much the property costs on the market through the sites available (like Zillow for example), they can find something that might work in their favor. For that $1,400 would be much better than $2,000 to someone who needs a place to live.
How to determine a good rent estimate by performing your own due diligence
So now that we understand all this, you still need to conduct due diligence to determine a rental price. To do that, you should try a few more things. Remember, this investment should make you money and that money will come easy if you do the right things. But in the beginning, you need to do your homework to be successful.
– Use your network
Online forums can help you connect with nearby landlords doing the same thing. It pays to be connected with others like you. BiggerPockets is one forum that you might find useful.
– Check out rental property sites
You’ll get a good idea of the comps in your area by checking on Zillow, Trulia, Craigslist and the other sites.
– Get rental ad ideas
Your wording is everything in those rental ads you see online. Pay attention to those and make note of ones that are effective. While you’ll need to be original, you can draw inspiration from those to attract the kind of quality applicants you want to rent your property to.
– See how much interest your property creates
Once you list your property, if no one is applying to rent it or there seems to be no interest in it at all, you may want to reevaluate how much you’re charging for rent.
- Is the rent you’re asking too high for the location?
- Is the parking situation a turn-off?
- Are there any amenities?
If no one is calling up to see your property, something needs to change.
It helps to be objective here. This is why asking a real estate agent could be an eye-opening experience, one that can help you get a tenant into your property so you can start earning on your investment.
How to properly conduct a rental market analysis for your property
Another area to explore is a rental market analysis. This could help whether you’ve got more than one property to rent out, one that has a high value, or you’re looking down the road for your future. It takes a lot of time and skill but it can help you learn more about the market situation, especially when it comes to understanding the rental market in your area.
Be ready to get in full detail about the following aspects for your property:
- Transportation links
- School ratings
- Crime rate and safety of the area
- Comparable properties in terms of location, size, square footage, and condition
- Price per square foot in terms of the rental price and number of square feet
- Amenities for your property which could include a gym, swimming pool, parking, shopping, and other desirable traits
And as the last point is rather important for making your rental property stand out, I’m going to detail that a bit further. It could be what leads you to a larger passive income so keep reading!
Consider your property’s amenities
Research is always important for real estate investors to make sound and profitable decisions. However, you have to think like a renter in terms of what is desirable. What do people want when they look for a place to live? Amenities truly carry a lot of weight with them.
In fact, in your research, you may come across a comparable property that’s around the same size as yours but it is missing a key feature or amenity. One big motivator is a washer and dryer in the unit. If your property offers this, you can justifiably ask for a higher rent. Most would-be tenants would happily pay it to as no one wants to shuttle baskets of dirty laundry to a communal laundry room or an off-site coin laundry.
The top amenities tenants look for when renting a property are things you should be looking at yourself, ideally before you invest. Though you can make adjustments after purchasing to add value and hence, make proper reasoning for higher rents.
What do tenants want? If you’ve ever rented a property yourself, some of this may seem quite familiar.
Having an accessible, safe and secure place to park is a huge draw, especially in markets where parking tends to be scarce. Think about what you’d want if you yourself were living in this property. If you have assigned parking spaces, many tenants love this feature, so they know they always have a place to park. But if that’s the case, be sure there are enough guest parking spaces. No one likes having added stress of wondering where their loved ones will park when they come over for dinner or the holidays.
Additionally, if you have a large garage, that’s certainly worth highlighting. And even if you have a property that has lots of street parking always available around it, this is a great point to make for renters.
Another thing renters look for is safety.
- How safe is your property?
- Are the lights bright in the parking lot?
- Is there a security gate?
- An alarm?
- Smart home technology?
If your property provides any of these things, it’s important to let renters know. Be honest too… some places mention they have security systems included but when prospective renters show up, they find out they need to pay an additional fee to activate it.
We all know this is one of the first considerations when renting or buying. Location is huge in real estate. It matters what you’re close to. For your renters, they may be looking at a place with easy access to the highway to connect to work but with great walkability in the neighborhood. The ability to walk to the local coffee shop or bar is a huge perk. So is the proximity to good schools, supermarkets, retail shopping, restaurants, or public transit.
Think about what people are looking for in a location and you’ll know what to highlight. For example, if your property is within easy walking distance to the best school in the district, it is definitely something you want to highlight and very likely, won’t remain vacant for long. People all want a high quality of life and knowing when they look at a rental listing that the things they desire are all close by is a huge plus!
– Outdoor entertainment areas
Amenities are all very important for attracting tenants. While some of them may be inside the property itself like new appliances, others might be outside on the premises. Some may be shared while others may be for each individual tenant. Patios and balconies are a great example of amenities that a property may provide each tenant. A heated outdoor pool is definitely attractive for the entire community, though in certain climates, if you have an activity clubhouse with an indoor pool and other recreational opportunities, you will have justifiable cause for a higher rent.
Other things that attract tenants these days are dog parks as well as separate playgrounds for children. In upscale areas, having a tennis court and fitness center are huge perks that will certainly lure in the right rental prospects.
So, if you have any of these amenities, this can only mean great things for you when you’re trying to get tenants to lease on your rental property. But even if you have every state-of-the-art feature, there’s a bit more to it than just slapping on a high rental fee. Keep reading to find out what you need to know!
Is there a rent control law in your city?
In some of the most coveted markets in the country, there are rent control laws. Without them, many people wouldn’t be able to afford rent. We’re already seeing a lot of trouble in the pricier cities out there like San Francisco for example.
Before you get into a market with a rental property, you should find out if the city you’re in has rent control laws. These limit how much rent you can charge and how much you are allowed to increase it each year. These laws are set at the local level, so the averages prices are going to vary by each city. New York, California, New Jersey, Maryland, and Washington, DC are all places that have rent-controlled properties. Make sure that you check if the city your property is in has rental control laws and familiarize yourself with those restrictions. Ideally, you’ll do this before you even put down the investment into a property so you know your limitations.
Why is it important to charge the appropriate amount of rent?
Once you do all your research and figure out what you might want to charge for rent, you should also consider why it’s important to charge an appropriate fee. You’ll want to attract the right kind of tenants for your property so you can get paid on time. Payment problems are the top concern among landlords and understandably so. The cost of an eviction because the tenant didn’t pay can go as high as $10,000 in legal fees and court costs, not to mention the time and expense it takes to fill a vacancy that you weren’t expecting to have.
If your rates are too low for the area you’re in and the kind of property you’re renting out, you will very likely attract a less desirable candidate, one who might not make their payments on time. Conversely, if they’re too high, you won’t be able to get any tenants in there and then forfeit a monthly passive income. So, you’ve got to strike a proper balance – a rent that is not too low or too high.
To do this, you should look at the average income for those that live near your property. That rental rate you make should target those with similar incomes. You can use TransUnion’s Income Insights to help screen tenants. It analyzes the prospective tenant’s income by comparing self-reported income with their credit behavior.
Applications help weed people out though you should confirm these things because anyone can make up information. It’s up to you to protect your investment, to know for sure that the renter in question really is employed by the company they say they work at and that they have no major criminal history.
find that out, here’s what you should confirm:
Does their income meet or exceed three times the monthly rent?
- What is their work history like? Have they been at the same job for years, or is there a pattern of constant job changes and unpredictability?
- Can you verify their income through an employer, or if they’re self-employed, through tax return information?
- Is their credit in good standing (preferably 620 or above)?
- Do they have any felonies or a regular pattern of misdemeanors on their criminal record?
- Do former landlords show favorable tenancy for this renter?
If you can confirm all of these things, then you’ve found yourself a solid renter for your property.
– It will help you cover your mortgage payments and other carrying costs
When you charge the appropriate rent for your property, you can cover the expenses that you incur on it. If you’re not able to handle these expenses, then you’re not charging the right price for rent.
While each property is different, there are many things that are common features. We’ll keep our example simple with a condo rental, however, be aware that if you’re renting out a home, you need to budget for a new roof at some point and incorporate outside maintenance like landscaping (which is year-round in places like Florida) or snow removal (in places up north).
In this example, the condo fee will cover water and sewer and the tenant must cover the electricity themselves.
My handy table below gives it to you in terms of numbers:
|Income Before Expenses
|Now to the Expenses:
|Mortgage Payments (Principal and Interest)
|License Renewal Fee
|Upkeep or Maintenance
|Vacancy (Even if there is none)
|The “everything that can break will break” fund
With this example, there’s a $443 positive cash flow every month. Most tenants will renew the lease unless they are offered a job in another location or something else life-changing occurs. So as long as you keep the rent fair on both ends and are a good landlord, you won’t wind up with a vacancy cost and you get the entire yearly $2,280 from that, added to your bottom line.
Plus, you may get lucky and have nothing break. If you don’t have to dig into your repair fund that you budgeted, it too will flow down to the bottom line.
– It helps you maximize your rental income
When you set the proper rental price, you maximize your profit potential. By doing it right, you can put as much as 6% of that rent right back into your pocket, leading to a smart passive income.
Of course, there is a bit more to it than that. You’ve got to track the rental value of your property in the local market. And you’ve got to collect that rent. Do you do it yourself or hire out? To make the best decision, keep reading!
How to track your house’s rental value in the local market
As I said before, you need to do your research on the local market. There are some markets that are very challenging, like San Francisco for example, because rent is always rising rapidly. It’s a pretty challenging task but it can be done.
Take a deep breath and look at the local market reports online (use Zillow) and you’ll find the median rent in your area as well as places nearby. By doing this, you’ll see if the rents are rising or falling. You’ll see by how much and whether you can expect them to increase or decrease.
Check local market reports before changing house rental rates
That rental price you settle on isn’t some set-in-stone amount. It’s based on a dynamic value that fluctuates with the local market conditions as well as your direct competition. It’s your choice what to charge within the range that you find. Depending on how the market is, when it’s time to renew the lease, you may need to increase or decrease the rent.
Be prepared in an increase though that renters might not be keen on shelling out more money, especially if there is no value-added and the property isn’t as nice as neighboring rentals. You can avoid problems by looking at Zillow’s rent index to anticipate annual growth percentages in your area.
Again, I like numbers, so consider this example. In a busy hub city like Atlanta, the average monthly rent for May of 2019 was $1,462 which was 5% more ($69) from the year before. Researching what it will be for the following years is your key to finding a comfortable rent for tenants and a comfortable profit for you.
The best means to collect rent from your tenants
Flexibility is always a good thing when it comes to collecting rent from your tenants. You should have multiple methods for collecting the rent. Some renters prefer to do it online. In fact, Zillow published a report that 58% of renters would rather pay rent online. However, only 36% of renters are presented with that option.
The convenience of paying the rent is important too. You can use an online payment tool at no additional cost to you or your tenants if they pay with ACH. It’s an easy, secure, and efficient way to collect rent.
You can also collect it in other ways, and ideally, having a few of these options available makes it convenient for all tenants. For example, if your property is a large luxury apartment complex, you may have shift nurses renting from you that work odd hours. To only allow rent to be hand-delivered to the front office is very inconvenient for many people. You want them to be able to turn in their rent without hassle and on time.
– Use a property manager
Don’t let the expense of this scare you off. You can hire one that is only in charge of collecting rent without having them oversee the entire property. However, if you do have a large rental property, it really might be best to ensure someone is always managing it.
– Collect it in person
If you’re merely renting out a home to one tenant, say a nice family, you can accept the payment face-to-face. Never collect it in cash though.
You can also allow renters to mail a personal check, money order, or cashier’s check to you by a certain date each month.
– Drop box on-site
When you rent multiple units, a drop box is a secure and convenient way for everyone to get their rent in on time. You can have tenants drop in a check or money order and not worry about having to find a time to meet up.
– Direct deposit
Some tenants will travel often for work or be busy. Allowing them to direct deposit the rent makes it very easy for everyone.
In today’s tech-driven world, paying online is one of the most convenient ways to go about rent, for both parties. Rent collection apps might be another way to go. You can use Venmo or PayPal with complete ease.
Should you hire a property manager or collect the rent yourself?
The passive income you’ll generate from your real estate investment should provide a nice, steady amount of money. But do be aware that your rental property will only generate income when you have great tenants that pay rent on time, every time and don’t cause damage to their units.
If you have a difficult tenant, it can be very difficult and time-consuming. This is why many landlords hire a professional property management company to oversee everything. When you have multiple properties, you absolutely must or your head will spin. Or at the very least, be prepared to do it all yourself. And that’s not as much fun as simply collecting the money.
You’ll save time and money, plus it will be more rewarding to be a landlord when you’ve got someone working for you to keep everything running smoothly with your property.
Perhaps the absolute best benefit of choosing a property management company to represent your property is that they will do all of the tenant screenings. It is a huge mistake to do it yourself and not run the proper checks for background and credit because you don’t know how to do it. Rest assured, if you skip this crucial step, you might be renting out to a dangerous felon or someone who has a terrible credit history.
The property management team will also take care of all the legal aspects involved with tenants and property maintenance. The laws for landlords and tenants vary not just by state but by municipality as well so you really need to know how to handle any problems through and through. An experienced property management company will know all of this. If they need to handle evictions, inspections, lease terminations or negotiations, and collect the rent, they are well-versed in all of these.
Additionally, they’ll ensure your property is up to code for safety. All of these services are invaluable because they will help you avoid legal problems and pricey lawsuits.
On-time rent collection is the only way you can gain a reliable income. If you don’t have good control over this then you will not pay property taxes and other expenses associated with your property on time. If you don’t want to hear sob stories about why someone couldn’t make the rent or be enraged when someone writes a bad check, do yourself a favor and liberate yourself by hiring a property management company.
Likely, you have other things you need to do, don’t you? Perhaps you’re starting out into real estate investment and would like to get back to investing in something else. This is all about delegating and when you delegate this responsibility to a property manager, you remove all that stress. They will make the calls that need to be made and collect the rent for you while you focus on other endeavors.
The downside of being a landlord is lease enforcement. The contract of the lease is designed to protect both you and the tenant, but usually it will be you that suffers when the tenant breaks their end of the bargain. Property managers handle all this though and you won’t have to worry a bit.
For example, if you have a strict no-pet policy (unless it is a legitimate service animal), and your property manager finds out someone has one of those yippy little dogs hidden in their apartment, they will give an ultimatum for that pet to be removed or consequences will be had as stipulated in the lease agreement.
Property managers can also ensure that if your tenant makes any changes that were not agreed upon with you or damages something that they will cover the repairs. Basically, the only way you’re going to make money from this is to consistently collect rent on time and keeping the tax burden down on that property. If you don’t get the right number of deductions, you could be penalized on the local, state, or even federal level. Plus, you may wind up with more taxes. The property management company helps you know which deductions you can claim and organizes everything for tax season. That saves you time and money, preventing you from incurring fines or penalties from improper filing.
A property management company also helps shorten any vacancies. Vacancies always cost you money. It may take you months to get the property ready to rent and evaluate it while a professional company you hire to represent you can make it happen faster. They can also help you retain tenants better. When you get a good renter, you’ll want to keep them renting there as long as possible. How can you do that? By managing any repairs and handling problems promptly. Being courteous and efficient while keeping up the property also makes renters want to stay.
And while all these reasons are worth the expense of hiring a property management company as they will wind up saving you money, the best benefits are personal. For example, the stress that can come with managing a property as a landlord can eat away at you. If you have other responsibilities, delegating this one to a property management team makes so much more sense. You’ll be able to sleep at night.
You also won’t have to waste time personally making repairs, chasing after tenants for payment, or enforcing the lease terms. This means you will have so much more freedom. It’s so worth it. This means you can buy multiple properties in other locations and the property management company can handle all of them.
What is the average late charge for rent?
If you hire someone else to do this for you, you won’t have to feel like the bad cop when you need to collect rent. Especially when someone is late. Some people really do have emergencies come up, but it’s not your problem. This is why the property manager will be such an asset to you.
Still, should someone not pay on time, you should always have a stipulation in the lease that lets tenants know what will happen. Most rental properties don’t apply late charges on rent until the rent has been 3 days late. In some places, when rent is due on the first of the month, a property manager will allow the renter up until the 5th to submit the rent without a late fee.
But if the rent is late, you can use a flat fee which is the percentage of the month’s rent, or a daily fee which is a predetermined fee that will be tacked on for every day the rent is late.
Again, property management can make this a lot easier. Most Americans are unable to cover a sudden expense. Zillow’s group report found only 52% of renters would be able to handle an expense of $1,000 that suddenly came up. Instead of letting that stress you out, hire someone else to stress out for you.
How much you charge for a rental property depends on the average rents for your market and location, as well as the amenities and features of your property. It also depends on if there are any rent control laws in your area. Do your research first and see what you’re up against.
If you charge too little, you’ll never be able to pay the expenses associated with the property. Charge too much and you’ve got vacancies on your hand. Finding the right tenants helps too so you know you’ll get your golden paycheck every month.
Hiring a property management company is the smartest investment into your rental property though. This assures you’ve got someone working for your best interests and handling all the problems that arise so you can leave that stress behind.