One of the most important things a real estate investor should know is how much rent to charge for a rental property. Knowing how to set a proper rent price is the difference between periodic vacancies and lucrative occupancies.
Charging a rent that is too high or too low isn’t a good strategy. What you want to do instead is to charge a rent that is just right. But before we discuss how much rent to charge for an income property, let’s take a step back and talk about the main goal of a rental property.
The End Goal
The main goal of owning a rental property is to have positive cash flow. You could invest in real estate solely for appreciation, sure, but if you’re renting out, cash flow should be on your mind.
Positive cash flow is really just another way of saying that something should remain as profit once all expenses are covered. This is why it is so important. So, when figuring out how much rent to charge, positive cash flow should be your guiding principle.
Related: 5 Ways to Create a Positive Cash Flow Income Property
The best way to ensure positive cash flow is to search for positive cash flow properties. Luckily for you, there’s no need to look further. By using Mashvisor, you could scour the country for positive cash flow properties for both traditional and Airbnb properties.
Well, what if you are dealing with the opposite scenario, i.e., with negative cash flow properties? There’s still hope; read this to know how to deal with negative cash flow properties.
Factors Influencing Rent
In order to find out how much rent to charge, it’s vital to understand what impacts rent:
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Location
You’ve probably heard this a million times now, but what are the three most important aspects when buying investment properties? Location, location, and location. Location is essential for anything related to real estate, especially rent. Since the location of an area doesn’t change, it’s vital that you pick a rental property with a great location. Location determines the local housing market, which in turn influences the rent. If your property is similar to other local properties, your rent should be similar to theirs. You could justify a higher rent if the property has more to offer.
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Condition
Location cannot be changed, but condition can. The condition of a property will also impact how much rent to charge. If a property is like another one in terms of appearance but is in a better condition, it can be rented for more. A good way to enhance a property’s condition is through rental renovations. Adding amenities will come in hand, too. By having amenities that a tenant wants but not many have, you can justify a higher rent. Location is very important, but it’s not as influential without a good condition. Who would want to live in Beverly Hills if their house is always leaking?
Related: 6 Rental Renovation Tips to Know Before Spending Any Money
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Competition
Condition and location combine to produce competition. Knowing how your income property competes with nearby properties will give you an idea of your rental income. A great starting base to understand this is to use rental comps. By using rental comps, you could find out how much rent similar properties are charging. As you’ve guessed it, you can use Mashvisor’s rental comps to compare properties.
Another way to understand the competition is to talk to tenants and landlords directly. This way, you can find out how much rent to charge, relative to local competition.
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Fair Market Value
Once you factor condition, location, and the market’s competition all together, you get market value. Knowing the fair market value of a property is one step closer to knowing how much rent to charge. That’s because a property’s rent is determined by a percentage of its market value. There are two ways to find out a property’s fair market value.
The first way is through a professional appraiser. A real estate appraiser will find out a real estate property’s value by conducting an inspection. Once the physical properties of the rental are analyzed, the appraiser will perform a comparative market analysis.
What is a comparative market analysis? Well, it’s an analysis that compares your property to others in the market, in order to find out the market value. An appraiser will conduct a comparative market analysis after an inspection, but so can you. Mashvisor’s investment property calculator, which also works as an Airbnb calculator, allows you to find a property’s worth!
Related: Why You Should Consult a Rental Property Calculator First
Setting the Right Price
Finally, here’s how much rent to charge for your rental property. A property’s rent should be in the range of 0.8% to 1.1% of its market value. If an investment property is pretty cheap, meaning $100,000 or less, then charge around 1% to 1.1% of its value. On the other hand, if the rental property is relatively expensive, $350,000 or higher, charge about 0.8% of its market value. This standard ensures that you aren’t charging a rent that is too high or too low, but one that’s just right.
What About Airbnb?
This discussion so far has been largely geared toward traditional properties, so what about Airbnb? Finding out how much rent to charge for Airbnb properties follows the same principles, but with some differences. We’ve covered this topic in detail here and here, so make sure to check them out.
To Sum It All Up
Finding out how much rent to charge for a rental property is key to your rental income success. When searching for income properties, be sure to keep positive cash flow as the main goal. Also consider the property’s location, improve its condition, and understand the local competition to get an idea of the rent price range. Then, to get an exact rent price, find out the property’s value. You can do this through a professional appraiser or a comparative market analysis. Finally, take a percentage of the property’s market value depending on its range. You will be left with the amount of rent to charge.
For more on rental income and ways to calculate and improve it, visit Mashvisor.