As a landlord or property manager, calculating the rental rate for your property is critical for your business’ success. The right rental rate can be the difference between attracting good tenants and earning a consistent profit or dealing with vacancies and struggling to cover your expenses. To strike the right balance, you need to consider your property's unique attributes, location, value, amenities, and condition. If you’re not sure where to begin, here’s 12 questions to help you figure out how these factors influence your rental rate and how to calculate a rate that will maximize the profitability of your investment property.
12 questions to help you calculate your rental rate
1) How does my property's condition affect what rent I can charge?
A well-maintained property will help you attract quality tenants who are willing to pay for the comfort and convenience it offers. When you invest in maintenance, repairs, and upgrades it can significantly enhance your property's appeal and you can justify charging a higher rental price. On the other hand, if your property is in poor condition, you may have a harder time justifying the rent because tenants don't want to pay a premium for a property in poor condition.
2) How does my property's value affect my rental rate?
In order to calculate the right rental rate, you need to determine the value of your property first. As a rule of thumb, the rental rate should be between 8%–1.1% of your property’s total value. That means if your property is worth $200,000, you should charge somewhere between $1,600–$2,200 a month for rent. Keep in mind that if your property is worth more than $375,000 you may want to charge less than the recommended 8%-1.1% threshold to increase your chances of attracting better tenants.
Not sure what the current value of your property is? You can hire a professional appraiser, leverage the Federal Housing Finance Agency’s house price index (HPI) calculator, or use an online estimation tool from websites like Realtor.com, Trulia, or Zillow. With the help of a professional and the right online resources, you’ll be able to see how your property’s value matches up against others so you can figure out how to calculate rent.
3) What are my competitors charging?
The current national average rent in the U.S. is $1,987. When you research to find out what other landlords in the area are charging for rent, make sure you’re comparing similar properties. For example, if you’re renting out a two-bedroom apartment, you can’t compare it to the rental cost of a studio’s price point. As you look for comparable rates, keep in mind the following factors:
- Lot size
- Neighborhood
- Number of bedrooms and bathrooms
- The year the property was built
- Most recent remodel or renovation
- Amenities
4) Am I charging enough to meet my own financial obligations?
When setting the rental rate, it’s important to make sure the amount you charge is enough to cover your mortgage and other monthly expenses. Of course, you also want to still make a profit each month, so aim to set aside a profit margin of anywhere between zero and six percent of the rent to ensure your investment keeps paying off. You may also want to factor in maintenance and repair costs, taxes, insurance, utility fees, vacancies, and property management costs. If you don’t do the math right, you could end up incurring more debt instead of maximizing your profits.
5) Do the seasons affect rent in my area?
More than 40 million people move every year with approximately 80% of those moves happening between April and September, otherwise known as peak moving season. That’s because people find it easier to move during the spring and summer rather than the cold winter months. Families in particular like to relocate before the school year starts. Depending on where your property is located, you’ll want to pay attention to seasonal patterns to determine your rental rates. When demand is high you can raise rental rates but if the demand is low, you’ll need to adjust rates accordingly.
6) Are there local rent control laws that apply to my property?
Rent control laws are designed to regulate the rental market and provide tenants with protection against excessive rent increases. If your property is located in a state or city with rent control laws, you’ll need to comply with them. If your property isn’t subject to these laws, you have a lot more flexibility when it comes to setting your rent. Either way, it helps to familiarize yourself with the regulations specific to your location to understand how much you can charge for your property. If you don’t, you could potentially face legal issues.
7) What’s the average income of residents in the neighborhood?
Understanding how much renters are willing to pay to live in your area can help you set a competitive and profitable rental rate. But it requires you to do some research and find out what the average income is for residents in your area. With a better idea of what prospective tenants can afford, you can set a rate that will attract tenants who are an ideal fit for your property. You’ll also minimize the risk of vacancies and set your rental business up for long-term success.
8) Does my property include amenities that warrant a higher rental rate?
Amenities often make or break a potential tenant’s decision to sign a lease. As the demand for rental units continues to spike, it might be in your best interest to invest in adding amenities, especially if you want to charge 3%–15% more in rent. However, to stay ahead of the competition you have to offer more than just the minimum like ovens, dishwashers, and laundry machines. These days, renters appreciate smart home technology and will often pay more if you have a coworking space available. It’s also a bonus if your rental is pet-friendly, has a pool, a nice outdoor space, a fitness center, or if you can provide a dedicated parking spot.
9) Are there any recent or planned renovations to the property that could justify a higher rental rate?
Renovations or upgrades such as a modernized kitchen, renovated bathroom, or updated flooring can be a huge selling point to prospective tenants. These improvements not only contribute to a better living experience but also allow you to command higher rents in line with the increased value and desirability of the property. By assessing the scope, quality, and timing of these renovations or improvements, you can strategically position your rental property to attract tenants willing to pay a premium for the added lifestyle benefits offered by the upgraded features.
10) Is the location of my property in a high-demand area?
There’s a reason why “location, location, location” has become a well known adage in the world of real estate. If your property is in a desirable location, the demand for your unit will likely be competitive. For many tenants, safety is a top priority and impacts their decision-making process. Beyond just a safe neighborhood, tenants enjoy the peace of mind that comes along with security systems, a secure package delivery room, well-lit areas, and neighbors who they can trust. They also look for properties that offer convenience and are in close proximity to grocery stores, restaurants, public transportation, shopping centers, and good schools. If your property checks off all these boxes and more, you may be able to set a higher rental rate due to its desirability.
11) What are the vacancy rates in the area, and how quickly are similar properties being rented out?
By reviewing the vacancy rates in your area alongside the speed at which similar properties are being rented out, you can gain valuable insights into the rental market's health and demand. Low vacancy rates coupled with quick turnovers indicate high demand and a competitive rental market, which means you may be able to set higher rental rates. Conversely, high vacancy rates and sluggish rental activity may signal oversupply or other market challenges, meaning you’ll need to adjust your rental strategy to minimize vacancy periods.
12) What's the property’s rental history?
Before you calculate your rental rate, look at past trends in occupancy rates, tenant turnover rates, and demand for rentals in your area. Were there noticeable patterns or fluctuations in rental rates over time? Is there consistent demand for your property? What other external factors have impacted the rental market in your particular neighborhood? The data you collect serves as a benchmark for understanding the market dynamics and enables you to make a more informed decision when setting your rental rate.
Price your rental with confidence
Setting the right rental rate is a delicate balancing act. Thankfully, you have tools at your disposal like calculators, market research, and online professional services that can make it easier. Partnering with a company like RentSpree can also help you streamline every part of the rental process—including how to price your rental. By using our custom Rent Estimate report, you can analyze local comparables, get accurate vacancy rates, stay updated on market trends, competitively price your listing, and more.
Ready to learn how to calculate the rental rate for your property? Get started now.
