Setting Rental Rates: What First-Time Landlords Need to Know
Learn which factors influence rental rates and how to calculate the right price for your rental property.
Real estate investments can be a great way to create an additional stream of income, but first-time property owners have to make smart decisions to meet their financial goals. Landlords must set rental rates that are good for their bottom line but also are competitively priced to attract the right tenants. Since it can be challenging for first-time landlords to know just how much rent to charge, here are some guiding tips.
Getting rental rates right from the start
Setting the right rent price has several benefits for first-time landlords.
Reduces the likelihood of vacancies
Unreasonable rent rates may keep your property vacant for a long time. As a landlord, unplanned vacancies will affect your bottom line and your rental property profits. On the other hand, setting a fair price will help you attract and keep the right tenants. Be sure to analyze other rental properties in the area and research how much your competitors charge.
Fewer delayed payments and evictions
The number one concern for 84% of property owners is non-payment of rent. When tenants fail to pay rent on time or miss payments completely, it can force landlords to take corrective action. An appropriate rental rate will help you attract the right tenants and ensure you get paid on time. Screen potential tenants and conduct a credit and background check to gain insight into an applicant's financial history and payment track record.
Ensures you offset rental property costs
Your goal as an independent landlord is to earn healthy profits while also securing the best tenants. If your property is not putting money back into your pocket each month, you haven’t set the right rental rate — or worse, you’ve over-invested in your property. When you set the right rent price, you can maximize your profits.
What factors influence rent?
Setting the rental rate too low will affect your bottom line, attracting lower-quality tenants and providing a lower budget for repairs and maintenance. Making rental rates too high can also be problematic, decreasing your chances of finding ideal tenants or not finding any at all. To maximize your property investment, here are a few factors that impact rent rates.
Property value
To calculate the right rental rate, you must know the current value of your investment property. One rule of thumb is to charge tenants 1% of the entire property’s value. If you purchased the property a long time ago and don’t know its current value, you can use an online estimation tool, refer to the Federal Housing Finance Agency’s house price index (HPI) calculator, or use a property management company.
Local tenant demand
One of the best rental property management strategies is to take advantage of peak rental seasons. During peak seasons you can optimize your vacancy cycle to make the most of high rental demand. Demand is higher in the spring and summer months, typically from May to August. Consequently, opting to offer a lower rental rate during the winter season may be the solution to avoiding vacant units.
Financial needs
Beyond considering demand, evaluate your internal financial needs for your property. Since your investment incurs a range of expenses, you’ll need to calculate your seasonal, ongoing, and variable costs to set a suitable rent price that still enables you to generate a profit. Rental property expenses include your mortgage, maintenance and repair costs, property taxes, property management fees, and landlord insurance.
Location appeal
Location is one of the most important factors that will affect how you set your rental rates. Your property’s location will establish a baseline rental rate and overall demand. If your rental property is near essential services, it will garner higher rents — for example, properties that are near schools, parks, transportation, shopping, entertainment, and restaurants are more valued among renters.
How to determine rent: Three golden rules
To know exactly how much to charge for rent, follow these best practices.
1. Analyze nearby listings
Do your research to find out what other landlords are charging for nearby properties that resemble yours. See how your property stacks up and compare what other properties in the market are charging. Look for the year they were built and how many units there are in the property. Pay attention to its amenities, whether or not the units include a washer and dryer, how convenient the location is, and the building's interior and exterior finishes. While it’s unlikely that you’ll find an exact match, it will still give you a rough indication of the local rental rates for units with similar property value.
2. Evaluate your expenses and determine an ideal profit margin
It’s vital to ensure that the income generated from rent is more than what you need to cover your expenses. While shaving down the cost of rent can be helpful in filling vacancies, it becomes hard to maintain the property if you pare down your profits too much. To make sure your rental rates are high enough, tally your total cost of ownership (TCO) — in other words, all of the expenses for owning and managing your rental property. Then determine your ideal profit margin and calculate your rental rates from there.
3. Review your property for any potential rent-boosting features
Adjust your rental rates based on any features that make your property more valuable. Do your rental units have special amenities or upgrades that similar units nearby don’t offer? Or do other residential properties in the area lack amenities that you have? After doing a comparison with other rental properties in the target market, determine which rent-boosting features you have that might serve as a differentiator. New renters might be willing to pay more rent if the units include new appliances, have convenient smart home accessories, or have other appealing features. Examples might include in-unit laundry, a swimming pool and/or hot tub, game rooms, co-working space, on-site parking, a gym, patios, balconies, and playgrounds.
The perfect toolbox to help first-time landlords determine rental rates
Ultimately, choosing the right rental rate early can set landlords up for long-term financial success. It can help landlords attract the right tenants, get paid on time, and maximize rental income. While rental rates can be increased over time, once a rate is agreed on any changes must be done in accordance with local laws and regulations, and they must meet customer expectations.
Being a landlord isn’t easy, especially if you’re new to the game. If you’re looking for a property management solution to help you along, Azibo is an ideal choice.
Azibo is a one-stop-shop financial platform for landlords that includes tools for every part of the rental process. With Azibo, you can create rental applications, screen your tenants, manage rent collection, track income and expenses, and much more.