"How much should I charge for rent?"
This is one of the most important questions in residential rentals. I'm going to skip all the preludes and pleasantries and just get straight to it. You've worked hard to acquire your rental property and get it into good condition. Now it's time to start enjoying the returns of owning property.
I'll detail 5 no-nonsense steps that will go into pricing your property successfully.
1. Start at the bottom.
This is only the beginning!
Every property owner needs a rock-bottom rental income figure. In a doomsday scenario, what's the minimum your property needs to earn to avoid losing money on your property? Start there and then work your way up. Costs to cover (for an outfitted apartment building) include:
- Mortgage payments
- Property taxes
- Home (and other) insurance
- Anticipated repair/maintenance costs
- Property management fees (if applicable)
2. Establish your personal goals for your property.
"Do I want to maximize rental incomes or reduce vacancy risk?"
This is essentially the "can't have your cake and eat it too" scenario in rentals.
- Apartments priced above market rates are harder to fill, increasing your "vacancy risk" (the likelihood that your apartment goes unrented). But if you pull it off, you're making hay.
- An underpriced apartment is like catnip to renters. You'll likely be able to list the property yourself and consistently find your unit full. But you could be missing out on hundreds of dollars in additional monthly rent.
The tradeoffs are clear.
Here's a simple example from Buildium, a provider of property management tools and technology:
"For instance, if you decide [to list your property at] $3,000 a month, that figure...is what you’ll miss out on if the property goes unrented for a month. So it may be better to just lower the rent by $100 to get the lease signed as soon as possible. That way, you would be giving up only $1,200 over the course of the year — instead of the $3,000 you would forfeit were the unit to remain unrented for a month."
I'm sure you've already been crunching the numbers for your property. It's stressful, but if you're honest with yourself about what you really want, you'll be better prepared for dealing with the results. And luckily for rentals, leases only last 12 months, so you can always adjust down the line.
3. Collect some "comps"
If you're new to the industry jargon, a "comp" is basically just a comparison property. You'll want to take a look at what property owners around you are charging for their units to help price your unit appropriately.
How can you collect comps? Try RentRange or Rentometer.
RentRange is a stellar service for new and experienced property owners to keep a close eye on the rental market at the hyperlocal and macro levels.
Address-Level Rent Estimates
- Basic Report: $6 each
- Advanced Report: $12 each
These reports are really effective at giving you an idea of what you should charge for rent. Here's an example of one of their Advanced "Rental Market Intelligence" Reports — it's really thorough and unlikely that you'll get a better analysis for less elsewhere. And here's an example of their Basic Report, which will definitely help you acquainted with what your units might fetch in the market (although you won't get an "automated rent estimate" from them, which is their assessment of how much to charge for rent for your property).
NOTE: Jumpshell doesn't have any affiliation with RentRange. I just think they do a great job with their products.
Rentometer offers a similar product, but also has a quick, free dashboard that will give you a hgh-level overview instantly.
You can also try doing it manually.
This one definitely takes a more work, but you can get to a pretty solid estimate for how much to charge for rent. Also, a major advantage to doing the legwork yourself is that you'll see a lot of pictures of units and see where other properties are situated in the neighborhood relative to your unit(s).
Build a "comp table" — a list of similar, nearby units and their features + pricing.
Here's an example of a "comp table" that we put together for a property owner client:
4. Pay close attention to what's going on in the market.
I'll use an extreme example in Boston, MA to illustrate how changes in your local environment can change how much you can charge for rent.
Major changes can happen quickly in the real estate market. Look at what happened in Somerville, MA when plans to extend a light rail line — the Green Line Extension Project (GLX) — was announced.
"The 'transit premium' will cause cause substantial rent growth."
Upon the announcement of the GLX, the Metropolitan Area Planning Council in Boston produced a report projecting that on average apartments near transit stations tend to cost 20% to 29% more than equivalent units further away. "Transit-induced rent increases" were projected range from at least 25% to as much as 67%.
What about smaller shifts?
Yes, the GLX is a pretty extreme example of major changes to infrastructure affecting the real estate market. However, even seemingly small changes can make a big difference.
The "Starbucks Effect"
Quartz, an online news source, reported on how proximity to Starbucks (and Dunkin' Donuts to a degree) may be boosting property values.
"Let’s look at the historical home value appreciation of areas that now are located within a quarter mile of a Starbucks. A home that is now near a Starbucks would have sold, on average, for $137,000. A home that is not near a Starbucks would have sold, on average, for $102,000. Fast-forward 17 years to 2014. That average American home has now appreciated 65%, to $168,000. But the Starbucks-adjacent property has far outpaced that, appreciating 96% to $269,000." Source: Quartz
How can you keep a bead on the local scene?
Get involved! Meet other property owners. Subscribe to the local paper. Go to commuity planning/zoning meetings. Again, even if you "mess up" your pricing for a year, you've always got a chance to fix things in 12-months.