Setting rent is an art form. You have to strike that perfect balance -- a rent that covers your costs of owning the home, is affordable for local tenants, and guarantees you a profit all at the same time.
It's a nuanced process, for sure, but it's one you absolutely have to get right if you want to ensure returns.
Do you need help setting rent on your investment property? Not quite sure where to start? This guide can help.
How much rent should I charge?
Rents are highly variable across the country. In some cities, a three-bedroom goes for a mere $1,000 a month, while in others, tenants will eagerly pay $3,000 for a place of that size. It really depends on local demand, property values, costs of living, and other market-specific factors.
As a general rule, though, many landlords end up charging around 1% of the rental property's market value. So on a $200,000 property, a month's rent would be around $2,000 -- give or take a few hundred dollars.
This isn't a hard-and-fast calculation, though. And while it can certainly give you an idea of where to roughly set your rent, you'll want to take into account a number of other factors before determining your final number.
Factors you'll want to consider
The market value of your property can give you a good number to start with, but to really home in on the right rental price, you should consider a few more data points.
Here's what you'll want to think about when determining your monthly rent:
Local rental comps
If you were selling a home, then you'd pull comparable property sales to determine your listing price, right? Well, renting out a unit is no different. To set an appropriate monthly rent, pull comparable rentals and find out what other properties of similar size and condition are going for in your rental market.
To do this, hop on Zillow (NASDAQ: Z) (NASDAQ: ZG), call up a local real estate agent, or use a tool like Rentometer to compare local listings. (You might even want to do all three to be safe.) Just make sure you're comparing your rental unit to others in the same vein as it. They should have similar amenities, be around the same age, and have the same number of bedrooms and bathrooms to really be a good barometer.
You also need a good handle on the property's costs before you can set an appropriate rent.
You'll want to tally up:
Once you add up all your expenses as the property owner, you'll have a good idea of the minimum rent you'd need to charge just to break even.
Rent control laws
Remember that the ball isn't completely in your court. If your property's in a city with rent control laws, there might be a limit to what you can charge a tenant -- on rent, on the security deposit, and on late fee penalties. Make sure you're up to date on your market's latest rental laws before setting your price (especially if you're in the Pacific Northwest or the Northeast, where rent control laws tend to be more common).
You should also take a look at local demand for properties like yours. How long are similar rentals staying on the market in your area? Are lots of people looking to move to the neighborhood? Is it up-and-coming or on its way out? An agent might be a good person to talk to about this.
If demand isn't so great in your part of the market, you might need to consider a lower-than-market rent to draw in more interest. On the flip side, if demand is high, you may be able to command a higher rent to match.
Adjusting your rent price later on
Don't forget that your rental rate isn't set in stone. If you realize you're putting a little more into maintenance and repairs than you expected, you can always adjust the rent when it's time to renew the lease. Just make sure you follow these rent pricing guidelines when you do it.