How to Set a Fair Rental Price for Your Property
No matter whether you’re a first-time landlord or the one with a wealth of experience behind your back, chances are good that setting the right rental price for your income property will be the top of mind question as soon as it’s time to list your property.
Unless you’re a professional property appraiser, there is always a risk of underselling or overpricing. And the bad news is that going to extremes is never safe. In the case of rental property, you’ll be losing money regardless of which extreme you choose. And it points unambiguously to one thing: setting a fair rental price is key.
With this in mind, we’ve rounded up a list of factors you should take into account when calculating the price. Read the article thoroughly, and you’ll learn to do it like an expert.
Consider a 1% Rule
In case you’ve never heard of this rule before, here is a brief overview. 1% rule is an economic theory saying that the amount of rent you charge should fall somewhere between 0.8% and 1.1% of your home’s market value. For instance, if the current value of your property is $350,000, you should be geared towards charging between $2,800 and $3,850.
And before you ask how to know whether it should be 0.8% or 1.1% or something in between, here’s a simple answer: charge the minimum range for cheap properties (those that worth under $100,000) and be brave to charge 1.1% for those valuing $350,000 or more. However, things would be too easy if there were no other factors but this simple rule.
What Factors Affect the Price?
Although plenty of first-time landlords believe that only size, location, and amenities matter, there is a little more than that. In fact, those who only consider the above-mentioned factors are not much better than those who pick numbers out of the air. So if your goal is to determine the real market value of your property and rent it out at a fair market price, make sure to consider both major and minor factors described below.
Among all the factors, location is chief. To see how important it is, compare median rental price in San Francisco and Cleveland. It’s $3,600/mo versus $525/mo for an apartment of the same size. Quite an impressive gap, right? And it’s true not only for different states and cities but also for different neighborhoods in the same megapolis. Thus, property in Upper West Side rents out for almost twice as much as, for instance, in Kensington.
The second most important factor is size. It goes without saying that a multi-level penthouse of almost 2,000 sq ft is not likely to be within the same price range as a small studio on the ground floor. Keep this in mind when playing with numbers.
Here’s the trick most renters know and use: to negotiate a lower monthly price, renters sign a rental agreement for the maximum term they can afford. This means that it’s ok to adjust your rental price depending on a custom offer your prospective tenant makes. Greedy landlords pay for their own lack of judgment with higher vacancy rates. Don’t be like that – stay flexible.
Median Income of Residents in the Area
Of course, you can always ignore this fact, but we strongly encourage you not to do this. Median income is what affects people’s purchasing (and renting) power. So you should take this into account. There is a rule of thumb that tenants should earn at least twice as much as they pay for rent per month. Go study the median income statistics in your city before setting a final price.
Rental Market Trends
There are plenty of factors affecting the rental market. Globalization, tech progress, urbanization, and demographic changes are only the tip of the iceberg. You’re not living in a vacuum, so you’d better stay tuned for all the chops and changes of the industry. For instance, if you see that the median rental price in your state has dropped by 5 percent, you’d better adjust your monthly price as well.
Minor Factors To Consider
Furnished or Unfurnished
For obvious reasons, furnished apartments cost slightly more than unfurnished. That’s why you should feel free to charge a little more in case your place is packed with all essentials and deserves to be called ready-to-live.
This factor is especially relevant to residential houses. How big is the surrounding area? Are there any amenities like a swimming pool or garden? Is the territory taken care of or requires investment? Answer these questions to see if you should charge more or conversely make a small discount.
Garage or Parking
Another factor that might affect a rental price is a presence/absence of parking or garage. This is especially true if your income property is located in the busiest part of a busy city.
In case you’re a pet-friendly landlord, there are two options you can use in regards to tenants with four-legged friends. First, you can set the same price for tenants with and without pets, but ask pet owners to pay a special pet deposit. Second, you can set a higher monthly price for tenants with pets while keeping a security deposit standard.
Separate or Private Entrance
Some people might say that private entrances are not a big deal, while others might consider it a privilege and agree to pay slightly more for the comfort of having one. Keep this in mind when setting the price for your rental property.
Ample Closet, Additional Basement or Attic Storage
Space is money. And that’s especially true for major American cities where each square foot is worth hundreds of dollars. Whatever type of additional space your property has, it’s a reason to charge a little bit more. Stay rational, however.
Hardwood Floors, Stainless Steel Countertops, and Other Details
Needless to say that such details add value to any property. They cost money when you buy and install them, so it’s completely normal to ask for a slightly higher rental price if your property boasts of any expensive appliances.
There is no established rule saying whether or not you should include utilities in the rent price. The choice is up to you, but we suggest making it an all-inclusive deal. Not only will this be more comfortable for your tenants to make one monthly payment only, but it will also protect you from situations when delinquent tenants fail to pay utility bills for many months in a row.
How to Know if Your Price is Fair
By now you know virtually all factors to consider when setting a rental price. However, it might still be a problem to find the perfect middle ground. If that’s your case, consider using the following approach:
- Start playing with numbers based on all criteria described in this article.
- Finally, land somewhere.
- Use this service to see where your price lines up with the competition.
- Adjust the price based on suggestions from Rentometer.
- List your property and find quality tenants.
If you’ve been reading the article carefully (and we hope you have), then you should know by now all the ins and outs of setting a true market price. And it means plenty of great things: you’ll have a stable income and low vacancy rate, while your tenants will treat you like an honest landlord and stay in your property for as long as possible.
Here at Rentberry, we work hard to make the rental world better. That’s why we’ll be glad if you share this post with landlords you know to spread the trend of a fair rental price around the globe.