One of the biggest decisions you’ll make with your rental property is what to charge your tenants for rent. You’ll need to charge an amount that enables you to make a profit, but at the same time, if you set your rent prices too high, you may end up with unduly long vacancies, pricing yourself out of the market.
Obviously, you can’t just make up a number, but it’s also a bad idea to base your rent price on any one factor, such as what other units in the neighborhood are going for. Instead, you need to consider several factors and come up with the price that makes sense.
But what are the most important factors to consider?
Variables to Use When Determining Rent
Keep these factors in mind when calculating your rent prices:
- Historical unit prices. If you’ve recently purchased an apartment building or home designed for rental tenants, look up what the previous owner charged for rent. You may be able to find this information on real estate websites like Apartment Guide, or you may even be able to ask the previous owner directly. Of course, this price may no longer be relevant, based on changes to the market or other variables, but it should at least give you a good starting point. If you’ve purchased a new building, or if you’ve remodeled a home for renters, it may be more difficult to get started. If that’s the case, you’ll need to move on to the next step.
- Competing rent prices in the area. Use an apartment hunting site, or even classified ads like those on Craigslist, to check out what homes and apartments in your area seem to go for. If you can, try to compare apples to apples—look at very similar units in the same area, and get a feel for the spread of prices that other landlords charge. You can also talk to other landlords or renters in the area, if they’re willing to disclose that information, to determine what’s fair and what’s competitive. Make sure you know the area well before you set a firm price.
- Livability. Next, consider how your specific apartment or unit is different from other units in the area. How attractive is it to potential tenants? Does it offer a better view than most other units? Does it have more space? Has it recently been renovated, compared to other buildings in the area? These are also important questions to ask if you’ve remodeled after the last known rental price for a given unit. If your place is better or worse than the competition, you’ll need to adjust your price accordingly.
- Timing. The housing market shifts almost constantly, and you need to know where the economy currently stands. In some economic climates, it’s better for dwellers to rent, while in others, it’s better to buy. You’ll need to adjust your pricing to compensate for either of these changes. You’ll also need to pay attention to fluctuations in housing prices and demand for your given neighborhood, and seasonal changes—for example, rent prices tend to peak in late spring and summer, when people move most frequently.
- Amenities and utilities. You’ll also need to consider how you’re charging for various amenities and utilities. For example, in some multi-family homes, the landlord is responsible for paying certain utility bills, factoring utility costs into the price of rent. If this is the case, you’ll need to charge your tenants more. You’ll also need to consider things like onsite laundry machines, or parking options, to price your unit appropriately.
- Your costs. Of course, one of the biggest factors you’ll need to consider are your monthly costs. How much are you going to pay for your mortgage, for insurance, and for property taxes every month? What about infrequent expenses like property management? What about unplanned expenses, like emergency repairs? Ideally, you’ll make more in rent than you’ll pay, but you may need to do some adjustments (on one side or the other) to make everything work together. The goal is to remain cash flow positive.
- Vacancy tolerance. Vacancies can be profitability killers, but some landlords are more tolerant of vacancies than others. For example, if you’ve afforded a big down payment and your monthly expenses aren’t a burden, you can survive a few months without a tenant without a problem; in this case, it may be better to charge a bit more for rent, waiting for the right opportunity to cash in. Otherwise, you may need to fill the property as soon as possible, and price the unit to move.
- Your goals. You’ll also need to consider your goals as a landlord. Are you trying to maximize profitability? You’ll need to do some in-depth calculations and pinch pennies to make things work. Are you merely trying to get by with as little drama as possible? It may be worth your time to charge less rent and find the ideal tenant for your unit.
Why You’ll Need to Stay Flexible
If all of these factors seem like too much to juggle at once, don’t worry. Setting rent prices can be tricky, but you’ll always have room for flexibility. In fact, you should anticipate fluctuations in your pricing as time goes on. The rental market will change, housing prices will change, your costs will change, and even your goals may change. What works for you right now may not work for you in a few months, especially if you find your rent isn’t attracting enough tenants. Commit yourself to being adaptable, even with all your research backing your decisions, and you’ll end up being far more successful in the long run.
Being a landlord is tough, especially if you’re new to the game. If you’re interested in making things easier on yourself, consider enlisting the help of property management services in the Katy, Texas area. Contact Green Residential to discover all the tasks we can take care of on your behalf.