How Much to Charge for Rent
One of the biggest mistakes you can make as a landlord is not knowing how much rent you should charge. Often landlords simply find out how much rent properties around them charge and go with the same. You may also take over a property and decide to stick with the same rate year after year, based on the previous owners rent amount.
This is wrong.
Setting the correct rental price is an integral part of being a landlord. You have to make sure you don’t go too low, or don’t go too high – you have to find that perfect sweet spot in-between, to maximize your return of investment.
Basing price on neighbouring properties is a big mistake. You have no idea what their overhead costs are, or the amount of maintenance that is required. You also have no idea how much research they put into their rental price. They could have picked a number out of thin air and stuck with it.
You need to do market research, and attempt to determine the optimal amount of rent to charge. Sometimes it will be trial-and-error; you might come up with a price that is too low, or a price that is too high. It happens. The main thing is that your rental price is never set in stone. You may have to keep it at a certain amount for a year due to the rental agreement you wrote up – however as soon as that contract is up, re-evaluate the amount and make sure that it’s still the best price.
I know a lot of landlords who go by the 1% rule: the property should rent for at least 1% of the property purchase price. So if the property is worth $75,000 then $750 in rent should be the bare minimum.
However there are many factors that make this “formula” invalid; it’ll never work in areas where property prices are notoriously high, and it depends a lot on availability and demand.
For many landlords, the amount of money you are actually going to earn is just 3%-6% of the rental price. That’s because taxes, mortgage, monthly bills, repair and maintenance can really eat at your income.
Of course there is no way to come up with an actual formula. If you have a lot of bills and a mortgage, you may want to aim for a higher rent. If you have no mortgage and can do all the repair & maintenance yourself, then you can afford to target a lower rent. If the area is in high-demand, then you can look at renting high. If there are numerous properties that are renting in the area, then it’s better to aim for the low-end of the spectrum.
First, you need to evaluate YOUR situation. Don’t factor in everything else at this stage – simply figure out the bare minimum amount that you need to earn to be at least break-even, or earning a profit. That’s the lowest figure – one you can’t go lower than. That’s a great base to start.
Be sure to figure out your return of investment as well. You need to make sure that at the bare minimum you cover any bills, property taxes etc, and also have enough left over for repairs.
Next, you have to study the market. Look at everything around you. Look at how in-demand the properties are. Look at what they are charging, and what they are offering. This is a great way to get to a “high point” for how much you are prepared to rent for.
At this point, you should have a low amount and a high amount set for rent. How much you want to rent for, really depends on your situation. Can you afford to have the property vacant for a month or so? If so, then you can start listing your property at the highest price point. If however, you need money yesterday, then aim towards the lowest price point.
As long as you plan ahead and research everything in regard to rent, you should be able to get the maximum return of investment for your specific situation and property.