Calculating Your Rent Rate for Maximum ROI
Determining your property’s rent rate basically comes down to maximizing your return on investment (ROI).
This doesn’t mean making your rent extremely expensive. If the price of your rent is a lot higher than the average rent price for comparable properties in your area, then you won’t attract tenants to fill your vacancies (and nothing is more costly than a vacant unit).
On the other hand, you need to make sure you’re charging enough to not only cover your mortgage payments, property taxes, and other expenses, but also to bring in as much profit as you can after these expenses.
As such, determining rent pricing is about finding the right balance, which enables you to maximize your ROI. Here’s everything that goes into calculating the proper rent rate.
Research Similar Properties
Before knowing what you should be charging for rent, you must perform in-depth market research. This involves compiling a list of what landlords in your area are charging for rent for similar properties. In your research, you should keep a running list that contains the following information for each property:
- Street address
- Rent rate
- Type of property
- Square footage
- Number of bedrooms
- Number of bathrooms
- Amenities (such as included utilities or facilities)
- Relevant miscellaneous features
The best place to find properties are listing sites. Sites like Zillow, Appartments.com, Zumper, Trulia, and even Craigslist are excellent sources for gathering information on the properties for rent in a given area. Try to focus on properties that are similar to yours and in the same market as yours. Rent rates in a different city can vary drastically.
Local landlords and realtors can also be good sources of information. By reaching out to experienced local landlords via social media or by joining real estate organizations, you can hear firsthand what they’ve learned when it comes to determining a property’s rent rate. Realtors, on the other hand, have an abundance of knowledge about the local housing market, and they may be able to give you information about current trends.
Choose Your Rent Rate
Once you’ve researched your real estate market and gathered relevant information for several properties, you can begin figuring out how rent rates are determined and eventually choose one for your property. There are a few approaches you can take.
- Assess Value Added
This approach involves working backward from the rent rate to assess how a landlord decided on their property’s rent rate.
Analyze the list of features and amenities you’ve compiled for each property. Each feature adds value to the property, which makes the price of rent higher. Your job is to estimate the dollar amount each feature or amenity is worth in your market by comparing the rent rates of all the properties you’ve found.
For instance, if you notice that properties with in-unit laundry machines are about $50 more expensive per month than otherwise similar properties without in-unit laundry machines, then you can estimate that in-unit laundry machines have a value-added amount of about $50. If your unit has a laundry machine, then you should factor that value into your rent rate.
- Make Rent Tiers
Another approach is to create rent tiers for the properties you’ve found.
Categorize the properties into tiers based on price per square foot and consider ordering the properties within each tier by the amenities and features they offer. Once you’ve completed your tier rankings, place your property where it should go based on its size and features/amenities.
From there, you’ll have a better idea of how to price your rent. Remember that if two properties are in the same tier and offer the same features, renters will choose the cheaper one. With that being said, if your price is lower than other properties while offering the same features and amenities, you may not be getting the highest return on investment.
- Calculate Your Rent to Value Ratio
Another approach is to calculate your rent to value ratio. This is the monthly rent divided by the total value of your property, or cost basis. You don’t want a ratio less than one percent.
For the most holistic calculation of your rent rate, you should consider each of these approaches before locking in a price. The importance of your rent rate cannot be overstated. If it’s too low, then you won’t get the best return you could be making. If it’s too high, you won’t be able to fill your unit. Take time to research and calculate an appropriate rent rate for your property.