Setting rent on an investment property is often a difficult decision, as you want to maximize profits without scaring away potential tenants.
If you don’t do sufficient research, it can really impact you in the long run – both in your vacancy rate and your ability to cover costs and generate a return on your investment. Also, once you have established the amount of rent to charge, it’s wise to regularly re-evaluate the price because of regular changes in the market.
The more experience you have at renting out investment properties, the better idea you will have at maximizing your income without having frequent or unnecessary vacancies.
Typically, there are two main methods used to determine how much rent to charge for your rental property. The first is return on investment, and the second is market analysis.
In order to work out the return on investment of your rental property, you first need to determine the costs of owning and operating it. Things to consider are the cost of servicing your mortgage, property management fees, insurance on the property, maintenance fees, and the amount of profit you want to make from the property on a whole.
Calculating how much to charge for rent based upon return on investment is a great mathematical exercise and puts fences around desired rent levels, but it is also very important to take into consideration what prices are suitable in the current property market.
Typically, the ideal way to determine how much to charge for rent is to combine your return on investment analysis with a market survey of rents charged for comparable properties in your area. Keep in mind that rent can vary significantly from street to street, and you need to take this into consideration and adjusting your rent accordingly.
Evaluating how much rent is being charged for similar rental properties in comparable locations is a great way to gather information before locking in your rent prices. It’s up to you make unbiased adjustments to your rent based upon rival properties in the area. For example, if you’re looking at similar properties, and a competitor property has a more modern décor than yours, this must be taken into consideration.
After you determine which rental properties are comparable, finding out the current market rent is easy. Put yourself in the shoes of a potential tenant and know the surrounding monthly property rents. You can do this by looking through your local paper and making appointments or going to open homes of rental properties in the market that are comparable to yours. This way you can know what is being charged by competing properties for rent in the market, and you can work out a reasonable amount to charge within this range for your property.