How much should I charge for rent? I’ve purchased an investment property and now it’s time to find tenants and start making rental income, but how much should I charge for rent?
When becoming a landlord of an Airbnb or traditional real estate investment property, this is one of the first questions you will have to answer.
Considering how much to charge for rent is just like pricing any other product in any other industry. It depends on the product you’re offering (in this case the rental property), demand, supply, and competition in the real estate market. It can be a little difficult to determine when first becoming a landlord, so we’re here to answer the question “How much should I charge for rent?” for you.
How Much Should I Charge for Rent for Traditional, Long Term Rentals?
There are a few different steps to follow in order to know how much should I charge for rent for traditional, long term rentals.
Perform Real Estate Market Analysis
The first step in finding out how much to charge for rent is figuring out the value of the real estate investment. This is best done through real estate market analysis. If you’ve just purchased the investment property, then you already know the value. However, if any time has passed or you’ve carried out any repairs or renovations, then you need to perform real estate market analysis. Once you have the value of the investment property, you should know that most landlords charge somewhere between 0.8% to 1.1% of this value. This will stand as the range for how much should I charge for rent.
While there are other factors that will affect where your price falls in this range, it’s a good idea to consider just how expensive your investment property actually is. The more expensive the investment property, the lower in the range you should charge. You want to make sure that the rent price is affordable and will attract tenants. So, if real estate market analysis reveals the value of your property to be $100,000 or less, then you can charge closer to 1%. However, if the value is much higher (like $350,000 or higher), you’ll want to charge closer to 0.8%.
Take a Look at the Competition
Now that you know the range for how much should I charge for rent, it’s time to take into consideration the competition. There are two ways to do this:
Mashvisor’s Rental Property Calculator
The first step is to see the rent price in your location. This data used to be hard to come by before real estate investment tools like Mashvisor’s rental property calculator. With the rental property calculator, you can check the location where your current investment property is. The rental property calculator will return the monthly rental income in order to give you an idea of what traditional rental landlords are charging.
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Track Online and Newspaper Ads
Another technique, which is more difficult than using a rental property calculator, is tracking online and newspaper ads. Of course, it has some benefits which is why you may want to consider using both techniques when trying to figure out how much should I charge for rent.
Find long term rentals in your location that are very similar to your investment property in size and amenities. Take a look at what the listed rent price is. Watch over a period of time (a couple of weeks) as to which of these rental properties get rented quickly and which are forced to change the rent price.
A benefit of this technique is seeing the specifics of what other landlords are offering. You might find some landlords offering things like a free TV or even utilities. What does this mean for you? It means that competition is very high and you might have to settle for a lower rental income than you initially expected if you want to get tenants into the rental property at all.
Consider Investment Property Expenses
The ultimate goal of real estate investing in a rental property is to have a positively geared investment property. This is an investment property whose rental income covers all property expenses and leaves over some cash for the real estate investor’s pocket.
When trying to determine the rent price, figure out all of the investment property expenses. This includes monthly mortgage payments, maintenance costs, insurance, taxes, etc. While the goal is to end up with a positively geared investment, on average most landlords pocket 0 to 6% of the rental income. Even if you were to break even for a while with the rental income, that would be better than losing money!
Keep Asking How Much Should I Charge for Rent
Finally, setting the rent price is not a one-time thing, not even with long term rentals. As the real estate market changes and demand for rental properties increases and decreases, you need to adjust what you charge for rent accordingly. This means following along with real estate market trends.
Of course, be aware of the laws in your state/city on how much to charge for rent along with how/when you can actually adjust the rent.
How Much Should I Charge for Rent for Airbnb rentals?
With Airbnb rentals, the answer to “How much should I charge for rent?” changes. Many new Airbnb real estate investors assume they can charge as much as they want, but that’s just not how it works. You have to follow a few steps to determine the rent price.
Consider Investment Property Finances and Do the Math
As with long term rentals, you need to figure out how much the Airbnb rental property costs you monthly. How much is the monthly mortgage payment? How much will you be paying for utilities (water, electricity, Wi-Fi, etc.)? Once you figure this out, it’s time to do the math.
If you’re renting out the entire property, you take the total of the monthly costs and divide that by 30. The result will be the MINIMUM of what you have to charge nightly to break even. If you’re renting out individual rooms, it can be a little more difficult to decide. However, if the rooms are pretty similar, then you can divide the final result again by the number of rooms. You’ll want to charge more than this amount in order to make any kind of profit.
Don’t Forget Airbnb Cleaning Services
Don’t forget to add in Airbnb cleaning service fee. Some Airbnb landlords clean the rental property themselves. In that case, charge based on how much time it takes you to clean the Airbnb rental property every time tenants leave. For example, some landlords would charge $30 if it takes them 3 hours to clean the place. If you use a professional cleaning service, just tack their fees onto the rent price.
Check Out the Competition
Just like with long term rentals, you need to check the local competition for Airbnb rentals. This can be done with Mashvisor’s rental property calculator or by checking listings on Airbnb.com. This will help you decide how much more you should charge beyond the amount to cover investment property expenses.
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Keep Asking How Much Should I Charge for Rent
With Airbnb rentals, this point is even more important. A smart Airbnb rentals owner knows that during weekends, holidays, and on-seasons, demand is much higher. This alone allows you to charge more for Airbnb rentals. During low-seasons or weekdays, you’ll have to readjust and lower rent prices in order to match the lower demand.
While it’s not as simple as setting any number that comes to mind, it isn’t hard to know how much should I charge for rent. Follow these steps for either traditional, long term rentals or Airbnb rentals and you’ll be one step closer to earning rental income.