Saturday, October 9, 2010
The First Time Landlord: Determining Rent Price
As a landlord, determining how much to charge for rent can be a difficult prospect. Setting a realistic market rent will be crucial to making the most out of your investment, regardless of whether you’re renting out your former primary residence following a move, leasing an investment property or renting out a vacation home on a seasonal/weekly basis. If you set rent too low you may end up leaving money on the table. On the other hand, if you ask too much in rent you risk having the property stay vacant for long stretches or seeing high tenant turnover.
Calculate your cost
Before you begin determining how much you can or want to charge in rent, it’s prudent to first gauge your total cost incurred from owning and renting the home. Your total cost will include mortgage payments, maintenance expenditures, any paid utilities and professional services you may require (such as property management, tax help or legal consultation). Avoid being too conservative when estimating potential maintenance and repair costs.
The cost of owning and renting out may not directly dictate the rent you charge in all cases, but it will serve as a vital baseline value which you can refer to as you get closer to setting a rent price.
Potential rental rates based on home value
Professional real estate investors often determine rental prices by looking at the total value of the home. A common rule of thumb is that for homes up to about $100,000, you can charge approximately 1.1% of the home’s value in rent ($1,100/month). With increasing home values, the percentage you can realistically charge will become smaller as the rental pool becomes more limited. For example, if your home is valued at $400,000, you may only be able to charge .75% of its value, or $3000/month.
In general, calculating rent in this fashion is mostly a useful theoretical exercise that can provide some framework for you to work within. While in some cases you may be able to price rent purely based on the current value of your home, in most cases the realities of the local rental market will play a far greater role in determining how much rent you can realistically hope to charge.
Understanding the renters in your market
Before investigating actual rental rates in your market, it’s important to actually understand the nature of the rental market and area renters. The needs of renters differ from those of potential buyers. For example, most renters will not be as interested as buyers in top of the line fixtures or brightly painted interior walls, because most lease agreements will prevent the tenant from changing such elements to meet their own taste. Things that will interest many renters include sturdy carpet that will resist wear and tear, appliances in good working order and plenty of storage space.
In addition, rental markets are often defined on a highly local level – notice how rental classified are often divided by neighborhood or sub neighborhood. The needs and wants of renters in your local area will greatly influence how much rent they are willing to pay for your particular property.
For example, a five-bedroom luxury house with attached three-car garage may have a tough time commanding high rent if located in a neighborhood whose rental demographic is predominantly students, single professionals or young couples. By the same token, a modestly sized studio or cottage will not rent for nearly as much in a suburban area popular with families and pet owners.
Establishing market price
To truly devise a competitive rent price, you will want to thoroughly research the prevailing rents of comparable homes. Start by scanning newspaper ads or online classifieds such as Craigslist to assess the price range for similar units in your area. Make sure to sample listings that are of comparable size and amenities, and which are near enough to your home to fall under the local conditions of your micro-market.
Once you locate some comparable properties, visit them to better compare their amenities, location, condition and level of maintenance with your own home. Rental listings often vary a great deal from what is advertised to what you see in person when looking over the property, and often this discrepancy can help explain drastic differences in advertised rent. Visiting three or four homes in person will give you the best idea of how your home stacks up against the competition.
Long term strategy
Before you settle on a final rental price for your property, take some time to consider what your overall goals are with the rental unit. Are you focused on making a profit from the unit or recouping as much of the ownership cost as possible? If so, you may decide to charge rent on the high end of the market, at the risk of experiencing higher tenant turnover or longer periods of vacancy between occupants.
If instead your goal is to ensure steady rental income from the unit, minimizing periods of vacancy, you will likely want have a pricing strategy more geared towards attracting long term tenants.
Eric P. Egeland, SFR, CDPE, e-PRO