When you’ve decided to rent out a property, figuring out the rental rate can seem like a shot in the dark. Go to high and you’ll never find a tenant; go too low and you’ll lose money on the investment. Thankfully, there are a few excellent strategies to help you with figuring out rental rates for your investment properties.
4 Things to Consider When Determining Rental Rates for Investment Properties
1. Calculating Rent Using Property Value
The easiest way to figure out realistic rental rates for investment properties is to calculate them using the home’s value on the real estate market. If you’ve recently purchased an investment property, you probably already have a good idea what it’s worth. For a property that you’ve owned for quite some time, you could use tools like Zillow to get a ballpark estimate, hire a home appraiser, or talk to a real estate professional who can give you an idea of its value. Working with a real estate agent has the added benefit of establishing a relationship with someone who can connect you with potential tenants.
To calculate your rental rate, you’ll use a percentage of the home’s real estate market value. Average rental rates are usually somewhere between 0.8% and 1.1% of that value. For example, if you estimate your home’s value at around $250,000, a realistic monthly rental rate would fall somewhere between $2,000 and $2,750. For homes that are valued at less than $100,000, most owner-landlords choose a rental rate that’s around 1% of the home’s market value.
2. Extras That Drive Rent Up
Certain factors make a property more valuable on the rental market than others, enabling you to charge higher rent. This includes square footage and the number of bedrooms (obviously a three-bedroom townhouse will rent for more than a studio apartment in the same neighborhood). Allowing pets also fetches a higher monthly rate. You can charge more if your rental has a garage, great parking, a nice backyard, or an additional storage area. If you’ll be including utilities (electricity, internet, water, or gas) in the monthly bill, you should charge for them. Properties with amenities such as a swimming pool, recreation room, or a laundry room can also charge more per month.
3. The Local Rental Market
Another factor that will come into play is what nearby rentals typically go for per month. No matter what your home is worth, if the rate you’re thinking of charging is much higher than other properties in the area rent for, it will be nearly impossible to find a willing renter. Turnkey properties in locations with great features such as proximity to shopping, schools, parks, restaurants, and public transportation often fetch higher rental rates in areas without these amenities.
Check out local rental listings to see how other properties stack up. You want to earn as much as possible, but when researching potential rental rates for investment properties, it’s important to remember that you have to be competitive. This is another area where a real estate professional or investment property firm can assist you, as they’ll be very familiar with the rental rates in various locations.
4. Make Sure the Numbers Add Up
Of course, the end goal to any rental property investment is to make money off of it. If you’ve purchased in an up-and-coming area, however, you may simply need to make sure you break even on cash flow each month. When settling on rental rates for investment properties, potential landlords have to make sure the rent will cover the monthly mortgage bill. They also have to add in any potential repair costs, homeowners association fees, as well as taxes and insurance before settling on a final number.
While calculating rental rates for investment properties may feel like a guessing game when you first start out, there’s actually some very real data at play to help you come up with a competitive and lucrative amount. If you have questions, ask a professional – they’ll guide you along every step in the process in order to help you use your properties to earn long-term wealth.