The perennial problem in business is what to charge for your product. Charge too much and you can’t sell, but charge too little and there is no profit. How do you know what to charge for a rental? Fortunately, there are a ton of resources online to help you decide how much to charge.
Just like any other any other product (your real estate is your product), market research will help you determine how much to charge. Do you charge the maximum the market will bear? Maybe. Maybe not. It’s possible that you may be better served to charge slightly less than the maximum the market will bear to open the property to better renters who may decide to live long term in your rental.
Before I even start ‘market’ research, I use a calculator that I developed to determine what I would have to charge to make the profit I want. My calculator is a detailed Annual Property Operating Data Sheet (APOD) and is available for you to use. Disclaimer: I developed this calculator for my own investments. The calculator will work for you as well, but does not guarantee success; it’s simply another tool to use. Ultimately, the decision to purchase a property is yours alone. (see: Resources; Using an APOD <Not online yet>)
After I know how much I must rent the property for, I start my research on the local craigslist to see if my style of house will rent for what I want to charge. A lot of property owners (myself included)
My next step is to go to rentometer.com and conduct the same search. This allows me to see roughly how many similar properties are in the area. Rentometer provides a good barometer for the type of properties that are in high demand. Is a three bedroom or a four bedroom house in higher demand (aka: which can I charge more for)? It’s easy to test your hypothesis, simply change the inputs to the search.
Craigslist and Rentometer offer a great springboard to start your search, but how much demand is there for your rental? How can you be sure there is demand for what you want to purchase?
For this, I also resort to craigslist. I produce an ad for my property with my desired monthly rent. I describe the property, how many rooms, pets (or not), size of the yard, what utilities the tenants are responsible for, etc. The one key bit of information I always include in the listing is that the property will not be available for three months. This gives me time to purchase the house and make some small renovations.
My experience is that half of the respondents are not serious, one quarter of the respondents do not qualify as good renters, and the remainder may be good tenants. If I am flooded with responses, I know I’m not charging enough for the property. If I get no responses, I may be charging too much for my rental. My non-scientific test for the appropriateness of rent is to get at least five inquiries within the first 24 hours of the post at a certain price point.
Once I have a good feeling for what the market will bear, what I need to charge for rent, and the number of respondents for my craigslist post, I have a pretty good idea what to charge. I try to keep my properties nice, therefore keeping my rents higher. Higher rents also tend to indicate the tenant has a job and is able to pay to live in a nicer place.
I do not want to have the highest rent on the market; tenants then start thinking that you owe them something because of the high rent. I prefer quiet, responsible tenants, and that is worth a few dollars per month. If rents are too low, the tenants don’t take care of the property, which can lead to costly improvements in the future.
Rent is not a static number. Always be aware of the changing demands in your local market. Is a developer building 1,000 new homes? How about a new high rise? Is a large local employer leaving the area? All of these things affect the rent you are able to charge.
Do you use any resources I haven’t mentioned?