When it comes to renting out your investment property, one of the most important decisions you’ll need to make is how much rent to charge. This can be a tricky process, as many factors go into determining an appropriate price for your rental unit. Set the bar too high and you might exclude your target market, resulting in a long vacancy period. Set the price too low, and you can lose thousands of dollars in potential profit.
By taking key considerations into account and using proven rent-calculating methods, however, you can come up with a fair price that will help attract tenants who will value and respect your property. With a little bit of research and some number crunching, you can find the perfect rent price for your rental property, and enjoy years of success as a landlord.
In this article, the team at Noel Jones discuss how to calculate the perfect rent price for your investment property.
How to Determine Rent Price
When you are trying to figure out how to set a rent price for a house or apartment, there is a selection of factors to take into consideration. These include:
Calculate Your Property Value
The value of your property will often shift with the market, but rental rates will likely follow, leaving it to be a solid factor in how you choose to set your rent price. Estimates place monthly rents at 0.05% to 1% of the wider value of your house or apartment. Naturally, there is a lot of wiggle room here that doesn’t account for other market and personal factors, so we recommend that you use this approach as an entry point to determine the rental rate.
Property appraisals can be conducted by your local real estate professionals, who will use their intimate knowledge of the current market to inform you of a realistic figure (you can even request a rental appraisal to save time, but more on this below).
Research Current Market Conditions
It’s important to understand how the current real estate market might affect the sort of rental rate you can charge for your investment property. For example, if the vacancy rates in your area are high, you will need to charge less rent for your property than if the vacancy rates are lower. This is because when competition for tenants is high, landlords typically have a tougher time finding suitable new applicants, and so may need to reduce their asking price in order to entice a reliable renter more quickly.
On the other hand, if there are not many rental properties to choose from in your area, then you will be able to charge higher rent because of the pressure now placed on potential renters who may need to act more quickly to secure a tenancy before someone else snaps it up. Supply and demand 101.
Therefore, begin by reviewing comparable market rents in your area through some online research. Start by searching for rental properties in your area that are similar to yours and note what the owners have set the rent price at. To avoid skewing your calculations, be sure to only focus on properties that are like yours in:
- Block size
- Floor size
- Number of bathrooms and bedrooms
- Construction year
- Garage space
- Amenities, such as swimming pools, air conditioning, home theatres and so on
Additionally, you can look for other types of market information that may help you get a clearer picture of the current rental environment in your area, such as recent housing market reports, local economic trends, and even vacancy rates for rentals in your surrounding neighbourhoods. These resources will give you valuable insight into how much rent is typically paid for units like yours so that you can adjust the price accordingly.
Leverage/Introduce Points of Difference
In general, people will be willing to pay more rent if they believe they are getting better value for their money. If your house or apartment offers a certain point of difference from others on the market, such as new appliances, modern flooring, swimming pools, solar panels, or simply offering them more garden space, then you may be able to determine a high rent price.
Do some research to find out if there are any cost-effective upgrades you could make to your property that would boost the perceived rentability of your home, and consider pricing accordingly.
The only trade-off, of course, is that when you introduce new and desirable features to your property, you are pumping greater expense and liability into your investment. Not too much of a problem should you be lucky enough to secure a pleasant tenant, but it can prove costly to make repairs or replacements should proper care and maintenance not occur.
It is therefore important to weigh the potential benefits against the potential costs before you introduce any new features into your property – essentially, calculate how your bottom line will look after you have increased your set rent price, and then further deducted purchases and maintenance expenses.
Cover Your Property Expenses
Speaking of expenses, every landlord will incur a range of management and running costs related to their property that needs to be considered when you calculate your rental rate. It is therefore incredibly important you have a good understanding of all the costs associated with renting out your investment property.
These costs can vary depending on where you live, but they typically include initial marketing fees for signage or ads in order to secure a tenant, as well as ongoing costs like property insurance, utilities, rates, and management fees.
Before you determine how you are going to determine your rent price, you need to make sure that you factor all of these costs into your rent calculation so you don’t end up in a situation where you are losing money each month as your rental income doesn’t cover your expenses. A rental property is like a business, after all, and no business can survive without a positive cash flow.
Receive a Rental Appraisal
Rental appraisals are a common tool used by real estate firms to determine the rent price for their client’s investment properties. These appraisals use similar methods to those mentioned above, including market analysis and comparable rental data, however are also combined with specialist insights to help you choose a fair rent price that is reflective of the current market conditions and your investment property’s value.
In addition to helping you decide on a rent price, rental appraisals can also be used as evidence in court if a dispute arises over the amount of rent being charged.
If you’re looking for an accurate estimate of what your investment property might rent for, or if you need help setting a fair rental price for your property, then it may be worth considering getting a rental appraisal from an experienced real estate agency. With its detailed market analysis and comprehensive data, a rental appraisal can provide you with valuable insight into the local real estate market and help you determine the best rent price for your property.
Test the Market
Given all of the information above, if you spend too long pulling out your hair trying to figure out how to calculate the rent rate for your house or apartment, you will be missing out on weeks of potential rent. Instead, try testing the market. Take what you have learned, set a limit, and let the masses of tenants (or lack thereof) tell you whether the price reflects the property value.
If no one signs up for your inspections, it is a strong indication that the price was set too high for the property, or if there are hundreds of people fighting to cross the threshold, maybe you should bump it up in order to maximise your profits.
Work with Noel Jones to Learn More on How to Determine a Rent Price for Your Property
Once you have a good understanding of all the relevant factors, you can start to calculate what sort of rent would be appropriate for your particular investment property.
A good rule of thumb is to set a rent price that is enough to cover all of your monthly expenses, while still making a profit. From there, you can adjust the amount upward or downward depending on how much competition there is for rental properties in your area.
Remember, when it comes to setting the rent for your investment property, it’s important to do your research and make sure you are taking all of the relevant factors into account. By following these tips, you can make sure you are charging a fair and appropriate rent that will help your investment property thrive.
If you need any assistance, our talented agents at Noel Jones have a long history of managing properties for rent in Melbourne and its surrounding suburbs. Contact us today to learn more and get started.