Placing your rental property correctly on the market will help you to attract tenants. It all starts with the realization: “It is time to rent my property.”Afterwards comes the question: “How much rent should I charge in order to make the most money from the rental?” The answer to this inquiry is difficult. You cannot set prices too high as it will keep many tenants away from calling you. On the other hand, if you charge too low, you might face a financial loss. “How much rent should I charge?” or “How much should I charge for rent?” it does not matter how you place the question, this blog you will provide you with all the aspects you need to consider when establishing how much to charge your tenants.
#1 Factors that Determine How Much Rent to Charge
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Location
The location is crucial when you are in the real estate investing business, especially when figuring out: “How much rent should I charge?” When becoming a real estate investor, you should know that the location determines the value of your property, thus, the rent. This is so because quiet and peaceful neighborhoods are more expensive than loud ones, for instance. The local housing market, hence, the supply and demand in the area also influence the property price as well as the rent you need to charge.
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Occupancy Rate of a Rental Property
When you ask yourself: “How much rent should I charge?” you always want to assure that the occupancy rate stays high. However, it does not mean if you set a very low rent you will attract many tenants. In fact, it may harm your business as tenants would question the quality of the income producing real estate.
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The Type of a Rental Property
In order to answer the real estate question “How much rent should I charge?” an investor should look at the optimal rental strategy for his/her investment.
- Airbnb Rentals
Airbnb rentals are more likely to generate a greater profit. Depending on the season, a landlord can ask for a higher or lower price per night because this type of income producing real estate is used as a vacation place. Moreover, Airbnb rentals are more flexible and you can decide “when to rent my property”. Would you like to learn more about Airbnb rentals? Make sure to read “Airbnb Rentals: Finding Income Properties Using a Heatmap.”
- Traditional Rentals
Traditional rentals are more secure. The reason is that the landlord is able to perform background checks on his/her tenants. Moreover, when renting out a house for a long period of time, contracts are signed between the parties. This should be done in order to ensure that the landlord will receive the rent and tenants can stay legally. Such rentals are associated with relatively constant rental income. However, when vacant, they tend to stay unoccupied for longer periods of time.
#2 Conduct a Real Estate Market Analysis to Find Out How Much Rent to Charge
The first step in answering the question: “How much rent should I charge?” is estimating the property’s value. The best way for a house investor to find out that value is to conduct a real estate market analysis. Moreover, if you have renovated the place make sure to conduct a real estate market analysis as the value of your property has probably increased.
It is important to note that there are two ways of analyzing the real estate market: qualitative and quantitative. The qualitative approach deals with the features of the building. However, the quantitative presents calculations of real estate metrics. By analyzing the real estate market, you can find the answer to your question: “How much rent should I charge?” You should know that the majority of landlords charge their tenants between 0.8% and 1.1% of the rental property’s value. You can get the market value of your property through comparison with rental comps. Rental comps are the properties with similar characteristics that are recently sold as well as positioned in the same location. Find as many rental comps as possible to get a better idea.
How much do real estate investors make? Well, depending on the rental property a house investor charges a different percentage. For instance, if the value of a rental property is $350,000 then you should charge approximately 0.8%. However, if the value of a rental property is $100,000 or less then the house investor should consider charging approximately 1%.
#3 Use the Rental Property Calculator
A helpful tool in answering the real estate question: “How much rent should I charge?” is the rental property calculator. With a rental property calculator, there is a possibility to see the rent price in your location. This is a very useful tool when checking how much other landlords charge for their Airbnb rentals and/or traditional rentals. When you have the overview of your location it is easier to answer: “How much should I charge for rent?”
Moreover, Mashvisor’s rental property calculator does much more than calculating real estate metrics and presenting the property price. Mashvisor’s rental property calculator provides you with in-depth neighborhood analysis as well as detailed investment property analysis. Make sure to read “Where Can You Find a Rental Property Calculator?” as it helps you to answer the question, “How much rent should I charge?” This real estate investment tool also helps to answer the question as it suggests to you the optimal strategy for your property and gives you specific information.
Try Mashvisor’s Airbnb calculator for estimating the potential Airbnb rental income of a specific property.
#4 What to Take into Consideration When Buying an Investment Property for High Rental Income
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Cap Rate
Cap rate estimates the return on an investment property based on the rental income that the investment property is expected to generate. Consequently, cap rate equals the net operating income (NOI) over the current market value of your investment. When becoming a landlord, make sure to make use of the cap rate as it presents the potential return that a landlord might have. Whenever you are dealing with real estate investing compare the cap rate of properties in the same location. Moreover, consider investing in a property with a cap rate that is a bit higher than the average in the area. This is considered to be a good cap rate for an investment property.
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Cash on Cash Return
The difference between cash on cash return and cap rate is that cash on cash return represents the NOI over the total cash invested. When becoming a landlord, you should know that cash on cash return serves as a good indicator to understand if it is a good idea to purchase an investment property. Moreover, when dealing with real estate investing, you should know that a good cash on cash return is considered to be a value between 8% and 12%. However, some investors argue that a good cash on cash return should be 20% or higher.
#5 Make Sure to Include Rental Expenses
The main idea when renting out a house is to generate a positive cash flow through Airbnb rentals and/or traditional rentals. Basically, the rental income should cover all the rental expenses and leave some profit for the landlord. When asking yourself: “How much rent should I charge?”, make sure to include any possible rental expenses in the computation. This includes maintenance costs, insurance, monthly mortgage payments, etc. When becoming a real estate investor, do not forget to estimate the taxes as well. Rental income is taxable and it is important to estimate how much it would cost you to be renting out a house.
#6 How to Generate Positive Cash Flow
The goal of a landlord is to generate a positive cash flow, therefore, making money in real estate. Positive cash flow appears when the inflow of money is higher than the outflow during a particular time period. Thus, a landlord should estimate the potential rental expenses in order to establish how much rent to charge for his/her investment property. The value should be greater than the costs. Make sure to leave some room for small changes in your budget as estimations are not 100% accurate. Would you like to learn more about positive cash flow? Make sure to read “Why Positive Cash Flow Is a Must With Income Properties.”
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