Published December 2022. Updated August 10, 2023.
Setting the correct monthly rent is one of the critical steps toward filling your property with quality renters. It's a balancing act (with some accounting and financial forecasting) to find the sweet spot.
For example, a rental rate that's too high deters quality residents. However, a rental rate that's too low will negatively impact your financial situation and may indicate that there are underlying issues with the property.
Just like Goldilocks' porridge, the rental rate has to be "just right" to maximize your revenue.
Because of this, our rental management experts are diving into four crucial steps to help you determine the perfect rate for your investment property. Keep reading to optimize your rental income!
Determining the ideal rental rate is crucial to the success of any property investment.
Here's why:
Attracting and Retaining Tenants: Price your property too high, and you risk prolonged vacancies, as potential tenants might be driven to more affordable options. However, lowering the rent too much to get tenants into your property faster means you're leaving money on the table and might attract tenants who are less committed to maintaining the property.
Maximizing Revenue: Achieving the right balance ensures that you are earning the maximum possible revenue from your property. An ideal rate considers the property's value, maintenance costs, and market demand, ensuring a positive cash flow.
Reflecting Property Value: The rental rate is often a reflection of the property's value. A rate that's in line with the property's amenities, condition, and location projects a fair image and helps in establishing trust with potential tenants.
Market Positioning: Setting an ideal rental rate after comprehensive market research shows that you're attuned to current market conditions. This can position your property favorably against competitors.
Financial Stability: Continuous and predictable income is a cornerstone of financial stability for property investors. An optimal rental rate ensures that the property remains an attractive and lucrative investment.
The best property management companies can tell you that the right rental rate is a lynchpin in the delicate balance of reducing vacancies, ensuring profitability, improving tenant satisfaction, and the overall success of your investment. It's not a decision to be taken lightly!
Again, as a property owner, you're free to set the rental rate at whatever number you wish. However, while property owners have flexibility when setting the rent amount, that's not always the best approach to boosting returns. It's also crucial to note that there may be ongoing rental control in your area, limiting the monthly rent rate.
Let's look at how to calculate the rental rate and the methods you can apply to find the "magic" number for each property.
"Comps," short for "comparables," refers to similar properties to yours. Comps are one of a property manager's main methods when helping owners determine rental rates. When researching comps, be sure to have an underlying understanding of value and what property owners are looking for in today's market.
Here are a few points to keep in mind when reviewing comps:
Size of the property (square footage)
Age of the property
Key features (i.e., a swimming pool)
Number of bedrooms
Number of bathrooms
Recency of renovations
Appliances
Don't forget to factor in location-based factors such as proximity to amenities or school zones, which will also affect property value.
When researching comps, the most accessible starting place is online listings, social media pages, and local print publications. Selling prices can also help indicate the overall market.
Remember that you purchased the property as an investment opportunity. Due to this, you must also consider the rental rate against your financial situation and goals. To start, consider your return on investment (ROI) targets.
Factor in all costs, including:
Mortgage repayments
Taxes
HOA costs
Maintenance costs (including a maintenance emergency fund)
Personal finance costs
Once you've considered these numbers, you can set your rental rate at an appropriate number to cover these costs and your ROI target. However, charging an exorbitant rate to earn additional profit while covering these costs may not be the best strategy.
Remember that property investors earn revenue from rental income and property appreciation. Therefore, also factor in the increased value of the property over time when running your numbers.
In step one, we took a local view to help set a reasonable rent; however, it's also significant to consider the overall rental market.
Understanding the underlying trends in the market can also help you determine an appropriate rate to set.
Consider the following points:
Supply and demand: To help determine this, measure the number of listings in the area. A high number of listings means a "renters market" (high supply), whereas limited listing refers to a "property owners market" with less supply and higher demand. In the latter's case, a slightly higher rate may be justified.
Vacancy rates: Vacancy rates refer to the percentage of available vacant properties. A high vacancy rate may indicate the area is undesirable or the properties are not renting well. In contrast, low vacancy demonstrates that the area is desirable for renters with higher competition for rentable spaces.
Market forecast: Market forecasts are predictions of the overall state of the market. Forecasts may examine interest rates, occupancy rates, the number of houses purchased, and more.
In your research, remember to consider demographics, the surrounding job market, and the migration rate to your area.
Suppose you'd rather not jump into the data and time-intensive process discussed above. In that case, a much simpler way to determine an appropriate rental rate is to go through a Chesapeake property manager like Osprey Property Management!
A property management company has access to industry-specific tools like a Multiple Listing Service (MLS), which provides an overview of all rental data across a specific area. Property management groups also utilize the strategies mentioned above to determine rates.
In this case, it's best to stick with local, experienced, and trusted management groups with good reviews from previous customers.
Losing money, attracting poor renters, or struggling to cover your ROI and costs can signal that the rent is too low. On the other hand, long-term vacancy and no rental income are some of the adverse outcomes of setting a high rental rate. When determining a rent amount, apply one or several of the strategies above to avoid both circumstances.
However, if you'd like to take the stress out of selecting a rate and set a number that is honest and serves your purposes, reach out to Osprey Property Management today. Our property managers have experience and use technologies to determine the perfect rate for your investment property, leaving you and your residents happy!
Get more expert insights into managing profitable rental properties with our free resource, the "Expert Guide to Rental Property Management."