One of the most common questions real estate investors ask themselves is “How do I set the right price for tenants who want to rent my property?” You never want to set your rent too high or too low.
Renting your property for too low, or below market value, is a pretty bad idea. You might be thinking, “Who in their right mind would do this?” Well, it happens. Some people rent out their income property for low prices as a favor to a friend or family member, for example. Others might do it because they are in a hurry to attract easy tenants and start making rental income. Once they do this, the real estate property is no longer considered a rental, so the investor loses tax advantages.
What about if I rent my property for too much? What would happen then? What implications does it have? If you had these questions in mind, this blog is for you.
How Can I Know if I Rent My Property for Too Much?
Renting your property for more than it is worth is a bad idea too. Your goal is to set a rental price that is just right and not in either extreme. There is one main symptom of renting a property for too much: high vacancy rates.
Related: How to Deal with Vacancies When Owning an Investment Property
A vacancy rate, which is the opposite of an occupancy rate, is the rate at which a rental is unoccupied by a tenant. Vacancies are the best indication that a property is not renting well. When a property is charged for too much, tenants will catch on to it. They will ask neighboring tenants and landlords what the rent of their properties is. They could also compare your income property with similar ones and see if you are charging them too much. As a result, more tenants will be deterred by the price, and the property will be difficult to rent out.
What Should I Do if I Rent My Property for Too Much?
Well, what should I do if I rent my property for too much? The answer is straightforward: find out the property’s fair market value and set the rent accordingly. The fair market value, as you would assume, is the value of the property based on the market it is in. How do you figure out your property’s fair market value? That leads us to the next question.
How Can I Determine the Market Value of My Property?
There are two ways to determine the fair market value of a property:
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PROFESSIONAL APPRAISER
Appraisers are used to find the value of jewelry, family heirlooms, and real estate properties. To find the property’s value, an appraiser will conduct a physical inspection of the property. After the property’s interior and exterior are thoroughly analyzed, the appraiser will perform what is known as a comparative market analysis. The physical features of the property will be compared to that of others, and the value of the property will be determined.
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COMPARATIVE MARKET ANALYSIS
You could conduct a comparative market analysis on your own by using Mashvisor! Using rental comps, Mashvisor compares the rent of traditional and Airbnb properties in order to give you a sense of how much your property can rent for. You could adjust the comps according to different features, like property type and location.
How to Rent My Property for the Right Price?
Now we’re one step closer to answering the question “How much do I rent my property for?”.
Related: How to Set the Right Rent Price for Your Investment Property
STEP 1: FIND OUT THE PROPERTY’S WORTH
This is the same thing as finding out the property’s fair market value, as already discussed. A property’s worth will depend on a lot of things including size, location, age, and features. Go ahead and conduct a comparative market analysis via Mashvisor’s investment property calculator or find an appraiser to find out the property’s worth!
STEP 2: THE RENT IS A PERCENTAGE OF THE PROPERTY’S VALUE
Once you find out the property’s value, you can calculate the right rent for the investment property. The rent price range is between 0.8% to 1.1% of the property’s value. If a property is relatively cheap, $100,000 or less, charge around 1% to 1.1% of the value. If a property is relatively expensive, $350,000 or more, charge around 0.8% of the value. By following these guidelines, you will avoid renting your property for too much or for too little.
STEP 3: INCREASE RENT BY IMPROVING THE PROPERTY
Once you’ve found out how much to rent the income property for, you can increase the rent in a few ways. “Wait, didn’t we just cover why I shouldn’t rent my property for more than it’s worth?”. Yes, but this is different. These rent increases are justified.
You can start by covering utilities in the rent. It’s a great idea to cover some of the necessary utilities. Some of these include heating, electricity, gas, and internet connection. How much you plan to cover will depend on the usage of these utilities. For instance, if the average cost of utilities is $150, you can add about $40 extra for the convenience that you bring to your tenants, increasing the rent by $190.
Related: How Your Investment Property Can Compete in the Rental Market
Upgrading the rental is a surefire way to increase the monthly rent. Consider adding new furniture, repainting walls, and installing new amenities. Adding amenities is a particularly good reason to increase the rent. By adding a new TV or refrigerator you can charge more in rent.
To Sum It All Up
Every real estate investor, especially beginners, should ask him/herself: “How much should I rent my property for?” If the only thing your property is attracting is vacancies and not tenants, your rent is probably too high. To make sure, find out the property’s value through an appraiser or comparative market analysis. From there, you can take a percentage of the property’s worth as rent, depending on how expensive it is. You can always increase the rent by upgrading the property and including utilities in rent.
For more answers to important real estate questions like “How much should I rent my property for?”, head over to Mashvisor.