How to Determine Your Rental Rates

Posted by Diane Franklin on June 16, 2016

Setting the monthly rent on your residential property may bring to mind Goldilocks and the Three Bears. Set the rent too high, and you won’t be competitive in your market. Set it too low, and you’ll be leaving cash on the table. Getting to a “just-right” price requires research, realistic analysis, and maybe even a concession that charging the highest possible rent won’t necessarily lead you to the highest possible profit, advises 5 Arch CIO and CFO Steven Davis.

“A starting point for setting a rental price is to check websites that give you an idea of the going rental rate for your property,” Davis advises. The most renowned of these is Zillow, which uses a proprietary formula to assign properties a monthly “Rent Zestimate.” The accuracy of the Rent Zestimate is dependent upon how much data is available for the property and similar properties in the area. For that reason, property owners should supplement this information with their own research.

“I’d recommend the landlord take a look at very specific comparables,” says Ryan Coon, co-founder of Rentalutions, creator of a software platform that helps DIY part-time landlords save time in managing their rental properties.

Coon recently made such a recommendation to an owner who was preparing to rent out his condo in a 50-story building. “I told him, ‘There are four other units in your building for rent. You’re going to find accurate information on what those units have—what amenities they offer, whether there’s a washer and dryer, whether it’s been remodeled, etc.’ If you dig a little bit deeper, you can find very close comparables, and that’s really the best way to set a rent price.”

Factors To Consider

“Determining your rental price is dependent upon various physical factors, including square footage, number of bedrooms and bathrooms, and, of course, location,” says David.

“Location is obviously one of the biggest considerations,” agrees Coon. Being in a desirable neighborhood will boost rent, and the market in which you are located also has a major impact. In major metropolitan areas such as New York or Los Angeles, for instance, rents are high because demand is strong. In less populous areas, the number of properties may surpass the number of renters, which drives rental prices down.

“There are other factors that figure in as well,” says Coon, “such as proximity to transportation, whether there’s parking—in the case of a single-family house whether there’s a garage or whether there’s a driveway. All of these different variables should be taken into account.”

One factor that sometimes gets overlooked is timing. “Time of year can have a huge impact on the demand for rentals,” Coon says. “Late spring or early summer is typically when we see the most demand for properties, and that’s when tenants will be in a position to have to pay the most.”

Ways to Boost Rent Prices

Obviously owners want to make enough rental income to cover all of the expenses they are incurring for their property and still allow them to make a profit. “If your mortgage payment is $1,600 per month and the market will only bear a rental amount of $1,400, that’s not a good situation to be in,” Coon says.

When higher rent is needed to cover expenses, property owners should consider modest investment in their properties to boost rents. “One unique trick is upgrading to stainless steel appliances,” Coon says. “I was talking with an owner recently who bought a new stainless steel refrigerator at Home Depot for $700 so he could get $50 more in rent each month.”

Another strategy that Coon has observed is to include utilities in the monthly rent. As an example, the utilities in a unit may have historically averaged $100 per month, yet the landlord charges the tenant an extra $130 per month for rent that includes utilities. The landlord gains $360 in profit per year while the tenant enjoys the convenience of paying one monthly sum and having more predictability regarding monthly expenses.

Profit Is the Key

“While setting the highest possible rental price may seem desirable, sometimes a lower rent can actually achieve a higher profit,” says Davis. Your first step, according to Coon, is to screen prospective tenants in order to eliminate those who might agree to a higher rental price without having the means to pay. It is worth dropping your rent by a few dollars if doing so allows you to attract a broader range of qualified applicants.

Says Coon, “The ultimate goal is to find someone who pays the rent on time and takes care of your property, even if that means sacrificing a little bit off the top-line rent amount.”

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