How Much Should I Charge For Rent?
Range of rent prices in the area for similar properties.
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How Much Rent to Charge: Landlord Guide to Rental Rates
Are you struggling to determine the right rental rate for your property? As a landlord, rental income is your primary source of revenue, but it can be difficult to know how much to charge. This landlord guide on rental rates covers market trends, state laws, operating costs, and tips for calculating how much to rent charge.
Why is it important to know how much rent to charge?
Setting the right rental price is crucial to maximizing your income as a landlord or real estate investor. In the latest TransUnion report, payment problems were the top concern for 84% of property owners.
Charging fair market rent attracts good tenants who will pay on time and renew their lease year after year. However, these rates may not be enough to cover your operating costs.
On the other hand, setting your rent is too high can force your best tenants to look elsewhere while your rental property sits vacant for months. In addition to vacancy costs, higher rent prices may also result in evicting tenants for unpaid rent, which can cost between $3,500 to $10,000.
As a landlord or real estate investor, there are three rules of thumb to follow to determine how much rent to charge:
- Minimum rental rate: The lowest amount that will cover all your expenses and generate a profit.
- Maximum rental rate: This is the highest amount you can charge without pricing yourself out of the market.
- Rental price per square foot: This is a standard way of determining how much rent to charge based on the square footage of the property.
Depending on market trends, some landlords adjust the monthly rent downward, provided that property expenses are covered, and a profit is still being generated. Adjusting your rents a bit below fair market prices can attract a wider range of prospective tenants while still generating a solid net operating income on your rental properties.
5 Tips for Calculating How Much to Charge for Rent
1. Do a rental market analysis
A rental market analysis compares similar rental properties in a particular area to help landlords and rental property owners identify trends and determine the right price to charge for rental units.
According to recent reports, the average monthly rent price for a 2-bedroom apartment in the United States reached $1,295 in February 2022, up from $1,100 the year before. Rent prices exceeded $2,000 per month in Hawaii and California, which are the most expensive states.
Factors to consider when comparing similar properties:
- Location and neighborhood characteristics (e.g., proximity to transportation, schools, amenities, crime rates)
- Size and layout of the property (e.g., bedrooms, bathrooms, square footage).
- Average rent price and potential for rental value appreciation
- Market conditions (vacancy rate, rental demand)
- Cash flow potential and ROI
- Management and maintenance costs
How to do a comparable properties analysis step by step:
- Find a popular and trusted rent data source (real estate agent or online rent estimate tool).
- Identify the location, crime rate, transportation, and neighborhood quality of rental properties.
- Check out how many similar rentals are within a 0.10-1 mile radius of your property.
- Only look at similar properties rented in the past six months to account for rent inflation.
- Calculate your rent estimate based on the area’s median and average rents.
- Use a rental listing website like Zillow.com, realtor.com, or apartments.com to list your rental property.
2. Research rent control laws
Rent control laws vary by state, so keep that in mind when setting your rental price. Research the rent control laws in your area to ensure your rent rate is legal and fair,
For example, California and New York have strict rent control laws. In California, landlords are only allowed to increase the rent by a certain percentage each year. New York landlords must provide a valid reason for raising rents. These landlord tenant laws can make it challenging to generate more revenue from your rental properties.
In contrast, Florida has no rent control laws and is considered a landlord-friendly state. Florida landlords have more flexibility when setting rental rates, so long as tenants are provided with reasonable notice. These landlord-friendly laws are a big reason why so many landlords are buying Florida rental properties.
3. Calculate operating costs
Your rent price should offset the operating costs to manage and maintain your rental property. Landlords and real estate investors often use the 1% rule to can estimate what to charge for rent. This rule assumes that one month’s rent is 1% of the purchase price. However, this rule can be misleading because it overlooks a lot of important variables that impact returns.
Common rental property operating costs and expenses:
- Repairs
- Utilities
- Landlord insurance
- Maintenance costs
- Property management fees
- Property taxes
- Mortgage payments
4. Determine the value of amenities
In a recent survey, over 2,000 United States renters said that smart home devices were among their most in-demand amenities. More than 37% of respondents chose smart home devices (temperature control, digital locks, etc.) as the most desirable property feature. These amenities can increase rental prices and attract quality tenants.
Amenities to consider when deciding how much to charge for rent:
- 29% of respondents said they want a fitness center
- 24% of respondents chose pet services
- 24% of respondents want outdoor kitchens
- 18% of respondents selected a package management system
- 17% of respondents chose lap and lounge pools
- 16% of respondents wanted a community garden
- 16% of respondents want a co-working space
- 15 % of respondents selected courtyards or rooftop decks
Remember, not all amenities will be relevant to charging a higher price. It’s always best to research the amenities for other rentals that are most in demand in your area.
5. Adjust rent prices for seasonality and rent inflation
Don’t forget seasonality when calculating how much you should charge for rent. The summer and winter holidays are high-demand seasons for renters. Rents may drop during low-demand seasons like fall and spring. The rent price for long-term or short-term rentals can be adjusted accordingly.
For example, tourist areas may have higher prices for short-term rentals during the peak season. State laws can affect adjusting rental prices for short-term or long-term rentals, so make sure to look up local laws before renting out your property.
Inflation also plays a role in determining rent prices. It’s common practice for landlords to increase rent prices to keep up with the rising costs of operating a rental property. Always look at the local market to assess inflation and the average cost of living when setting a rent increase.
How to use an online rent estimate tool
The example below is to show how to use a rent estimate tool should not be taken as real estate investing advice.
Step 1: Add your rental property
Add your property’s features, address, and the price you want to charge for rent:
- Number of Beds
- Number of baths
- Look back (how many months to check in the past)
- Radius (Smart = Rentometer algorithm)
- Building Type
Step 2: Analyze results
- Average rent can be misleading, so focus on median rent prices.
- Compare and review similar rentals closest in distance to your property.
- Make sure the number of bedrooms and bathrooms match.
- Look at pictures of the property to assess the quality of the finishes.
- See how much rent similar properties charge.
Step 3: Determine the rent price
Determine how much rent to charge by reading the detailed report. In this example, your rent price would range between $1600-1800. You won’t know how much the market will pay until you list the property.
The rent for a 1,500-square-foot 3-bed/2-bath house is much different from the rent for a 900-square-foot house. Most real estate investors buy houses that are relatively the same size as other houses in the same neighborhood or subdivision because tenants are unlikely to pay more rent for less space.
5 Best Rent Estimate Tools
- Zillow Rent Estimate Calculator: You can use this popular real estate website to get a free estimate of your property’s monthly rent price.
- My Rent Rates: Enter your property’s address, number of bedrooms, and bathrooms to get a free rent estimate.
- Rentometer: This tool offers a free basic version and a paid pro version that includes more detailed rental property information in addition to a rent estimate.
- Rentrange: Enter your property’s address and bedrooms and bathrooms to get a free rental estimate.
- Mashvisor: Input your property’s address and the number of bedrooms and bathrooms for a free trial or paid subscription to find out about rental rates, occupancy rates, and more.
Additional Considerations For Charging Over Average Market Rent Prices
Just like homebuyers, tenants often make decisions based on emotions. To justify higher rents, landlords and investment property owners can use these emotions to create more perceived value for renters.
Here are a few ways to do this:
- According to the Rental Housing Journal, pet-friendly properties can increase rents while reducing tenant turnover.
- Offering utilities as part of a rental rate can be a great way to add value for tenants.
- You can justify a higher rent by installing energy-efficient appliances that show your commitment to the environment.
- IKEA’s inexpensive yet stylish furniture adds value and can keep tenant move-in costs low.
- Make sure your leasing agent uses a well-written description and great property pictures that connect with your prospective tenants when advertising your property.
- Perform a rental market analysis before your current lease expires to maximize your potential profit.
Final Thoughts
Setting the right rental rate is crucial to maximizing your income as a landlord or real estate investor. When determining rent, consider factors like operating costs, amenities, seasonality, inflation, and perceived value.
Your rent should at least cover the cost of your property taxes, insurance payments, and monthly mortgage payment, with a bit left over for parking, pets, and utilities.
When it comes to collecting rent from tenants, online rent collection is the best way to go. Cash and checks are time-consuming and run the risk of getting lost or stolen. Online rent collection enables quick and easy payments, automatic reminders, and reporting.
Baselane’s online rent collection automates the entire rent collection process to ensure tenants pay on time. Our platform also comes with built-in landlord banking, automated bookkeeping, and rental income insights
to help manage all of your rental property finances in one place.
FAQS
Operational costs, seasonality, inflation, and perceived value all affect rent calculation.
Most landlords use the 1% rule, which states that rental rates should be around 1% of the purchase price. However, this rule ignores a lot of important variables that impact returns.
The final rental rate should also consider amenities offered, location, and local market conditions.
Location, amenities, and market conditions can influence how much rent to charge for a room
in a house. For shared living spaces, it’s common to charge around 30-50% of the total rent.
When determining the final rental rate, research the local market, consider amenities offered, and factor in any additional costs to operate and manage the rental property.
Rent increases must comply with state laws and regulations. To raise rent prices, research the local market and consider factors such as inflation, operating costs, and perceived value. Give notice to tenants in advance, providing a valid reason for the increase.
In this guide:
