You’ve successfully made it through the buying process and are now the new owner of a rental property. But before you can even start advertising your property for rent and screening tenants, you have to determine how much to charge for rent.
Well, you need to set a rental price that is high enough to generate positive cash flow. It needs to cover your mortgage and operating expenses and leave some cash as profit for you every month.
But, you can’t just set a rental rate based on how much profit you’d like to make on your rental property. You also need to consider other things like rent control laws, rental comps, and what you’re actually offering to tenants in terms of location, amenities, and accommodation.
And it somewhat differs if you’re investing in Airbnb rentals vs long term rentals.
To help ensure you maximize your rental income and enjoy a high occupancy rate, we’ve put together this guide for landlords who are just getting started in 2020.
How Much Should I Charge for Rent If I Own a Long Term Rental Property?
For a long term rental property, here are the elements you will have to study before setting a rent price:
- Rent Control Laws in Your City
- The Average Rent Price in Your Location
- Your Investment Property’s Value
- Your Rental Property Expenses
- Rental Comps
1. Rent Control Laws
Rent control laws will dictate how much you can charge for rent as well as how much you’ll be able to increase the rent in the future. So as a landlord, you need to be aware of which rental laws and regulations apply to your property and how they affect your rental rate.
As of 2020, the following locations have rent control laws:
- New York
- District of Columbia
- New Jersey
California and Oregon recently implemented statewide rent control. Be sure to check what laws apply to your city and zone. Start by checking your local government’s website.
2. The Average Rent Price by Location
The next step is to get an idea of what you can charge by looking at average rents in the area. You can start by looking at the average rent price by city. This requires a little online real estate market research. Check out different housing market reports and blogs on various real estate investor websites.
While your rent price may vary greatly from the average rents of the city, it will give you a kind of starting point of what you can charge. For example, Mashvisor’s data shows that the average rental income in the Los Angeles real estate market is currently $3,330 while in the Cincinnati real estate market, it’s $1,243. So it’s likely that you’ll be able to charge much more in LA than in Cincinnati.
A better indicator of rent price is the neighborhood average. Sticking with the example above, in the West Price Hill neighborhood in Cincinnati, the average rental income for a long term rental property is only $713 which is below the city average by a few hundred dollars. This is because neighborhood amenities play a big role in rental rates. If your rental property is in a neighborhood that is walking distance from entertainment venues like bars and clubs, near good schools and is close to public transportation, demand will be higher. And you can charge more for your rental property. So getting this data will bring you a lot closer to your actual price.
To get accurate rent estimates by neighborhood, visit Mashvisor and simply type in the name of your neighborhood. You will be shown the average rental income along with a few other metrics such as the average cash on cash return, the optimal rental strategy, and the Walk Score:
You can also visit the Neighborhood Analysis Page for a more in-depth neighborhood analysis:
3. Your Investment Property’s Value
Now it’s time to determine the value of your real estate investment property. Having just purchased the rental, you may already have an idea of what your house is worth. But if you went ahead and made some renovations or added some amenities, you will have to conduct a comparative market analysis (CMA). It’s likely you or your agent conducted one during the buying process, but if you’re unfamiliar with it, it involves:
- Gathering as much property information as you can
- Assessing the neighborhood
- Finding real estate comps
- Calculating the price per square foot
- Adjusting the value for differences
Read Comparative Market Analysis: A How-To Guide for Real Estate Investors to learn more.
The final step of adjusting value is important. Renters will be willing to pay more for things like storage space, air conditioning, and even parking spaces. If you plan to allow pets in your rental property, you can also charge more. While these are not the typical adjustments you’d account for in a CMA, they are key when determining rental value.
Using the value of your investment property can help you determine rent amounts. Some landlords follow the 1% rule or the 2% rule. Each states that how much you charge for rent should be 1% or 2% of the rental property value. However, such rules don’t account for rental property expenses. So they should be used as a guideline. Even so, knowing the rental value of your property will help you come up with an appropriate price to charge compared to market rates.
4. Rental Property Expenses
While you haven’t begun operating your rental property investment just yet, you should have an idea of what you’ll be spending every month on:
- Mortgage payments
- Property taxes
- HOA fees
- Property management fees
- Maintenance fees
- Rental income taxes
As mentioned, you cannot just set a rental price to ensure you’re earning a ton of money after all your expenses have been covered. At the same time, you want to be aware of your expenses so that you can set the price high enough to earn some positive cash flow. This is your profit (cash flow = rental income – expenses). While some landlords are forced to break even for a while, just be sure you aren’t generating negative cash flow and losing money on your real estate investment.
5. Rental Comps
The final step is to check out competing rental properties. What are comparable rental homes charging in your real estate market?
One way to do this is to check local rental listings. Find long term rental properties that are comparable to yours in terms of property type, size, and amenities. How much are they asking for rent in the ad? It’s also a good idea to track these listings for a few weeks. Some landlords may be asking way too much and you’ll see that after some time of suffering through vacancy and negative cash flow, they may lower the asking rate. Also, keep an eye on the ones that are rented out quickly as they likely set a competitive price.
A much easier and quicker way to do this is to use Mashvisor’s Rental Property Calculator. It can easily show you how much to charge for rent as it automatically calculates rental rate for you. All you’ll have to do is add your rental property to Mashvisor. What you’ll get is a complete rental property analysis which includes:
- Rental Comps
- Pre-Calculated Comparable Rental Income
- Rental Property Expense Estimates
- Cash Flow
- Cap Rate
- Cash on Cash Return
- Occupancy Rate
This property data is based on the rental comps for your investment property. In seconds, you will know how much to charge for rent. And if you wish to take another look at the rental comps, you will have a list to work with.
Related: How Much Can I Rent My House For?
How Much Should I Charge for Rent If I Own an Airbnb Rental Property?
How much should you charge for your Airbnb? For an Airbnb rental property, here are the elements you will have to study before setting a rent price:
- Airbnb Laws and Regulations
- Average Airbnb Occupancy Rate by Location
- Average Airbnb Rent Price by Location
- Airbnb Fees and Expenses
- Airbnb Comps
1. Airbnb Laws and Regulations
Assuming you already confirmed that renting out an Airbnb is legal in your location (whatever the strategy you’re implementing- non-owner occupied or owner-occupied property), you still need to dig a little deeper into the laws. While short term rental laws will typically not dictate how much you can charge for your Airbnb, they may outline:
- What you have to pay for taxes
- How many days out of the year you can rent out your Airbnb
- How many guests you can have at once
- Permits and licenses fees
All of these will play a role in how much you charge to actually make money with your Airbnb rental property. So be sure to check them out.
2. Average Airbnb Occupancy Rate by Location
While laws can play a role in Airbnb occupancy rates, certain locations will just be more or less attractive to tourists. So it’s important to understand how often your Airbnb property will be occupied.
You can check out average Airbnb occupancy rates by city. This information is available online through market reports or blogs. For the average Airbnb occupancy rate by neighborhood, you can use Mashvisor once again. Be sure to check out the Neighborhood Analysis Page for your location to gain insight into the rates.
3. Average Airbnb Rent Price by Location
You can dig a little online to find the average Airbnb rent price by city. Mashvisor’s neighborhood analysis can also show you the average Airbnb rates by neighborhood.
4. Airbnb Fees and Expenses
As with long term rental real estate investments, you will want to generate positive cash flow with your Airbnb. However, for a short term rental, you will have extra expenses to consider when determining how much to charge for rent.
For example, because of the naturally high tenant turnover, you will likely need to hire a cleaning service. Even if you want to be the Airbnb host that does it all yourself, it’s still smart to factor in a fee into the rental income. If it takes you, say 2 hours to clean the rental property on average, you may tack on $10 to the Airbnb price.
As mentioned before, there are typically more permits and licenses involved in running an Airbnb. And each will come with a one-time fee as well as a recurring fee that you will have to factor in.
5. Airbnb Comps
For Airbnb comps, you could check out Airbnb. Find similar short term rentals in your area and see what they are currently charging. You will also have to track them for a bit until you formulate your own Airbnb pricing strategy.
Alternatively, Mashvisor offers Airbnb comps when you add your listing to the platform along with an Airbnb rental income estimate for your investment property.
Don’t Just Set it and Forget It
With both traditional long term rentals and short term rentals, seasonality plays a role.
For example, if you’re advertising a long term rental during the summer, you can typically charge higher. This is a time when most people are making big moves and need a place to stay. The demand for rental property will be higher and you can take advantage of this and lock in a higher rental rate.
For Airbnb rental properties, seasonality plays an even bigger role. Some real estate markets enjoy only one season with a high Airbnb occupancy rate, during which you can charge more for your Airbnb. And during the rest of the year, you will have to lower prices to fill vacancies.
Be sure to stay up to date on local real estate market trends so that you can adjust your rental pricing strategy as necessary. And use real estate investment tools designed to help landlords determine how much rent to charge. Mashvisor’s rental data and Airbnb data is reliable and up-to-date. You can check out your rental property’s data any time to determine the right amount to charge.
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