As a beginner real estate investor, you are probably wondering how to calculate rental rate. This question is an important one. You see, owning rental property does not automatically earn you a good rental income. And fixing a high rental price is not the solution. Figuring out how much to charge for rent so that you have a cash flow positive rental property is. This would mean your income property is actually generating you some income.
In this article, we will give you the information you need to stop asking yourself, “How much should I charge for rent?” and start earning cash flow.
What Is Rental Property Cash Flow?
It is the difference between your gross rental income (the rental amount you charge) and the rental cost (all rental property expenses). If that number is negative, the rental amount does not cover all the expenses and you are at a minus at the end of the month. If it is positive, you have a net profit.
If you are looking for income property for sale, you can use the Property Finder to search by certain criteria and easily find a positive cash flow property. Learn more here.
Related: Real Estate Investing for Beginners: How Much Cash Flow Is Good for Rental Property?
So your rent calculation should take into account a projection of the expenses and your expected rental property income.
Rental property expenses
As a first-time landlord, you might be downplaying the rental cost. But it includes quite a few things that pile up:
- Maintenance and repair costs
- Property upgrades like a new dishwasher needed
- Utilities and supplies (toiletries, towels) for short-term rentals
- Insurance- Landlord’s insurance is about 25% more expensive than that of a homeowner
- Property management fees (if any)
Investment property financing costs are also part of the rent calculation. The mortgage payment should be deducted from the gross rental income.
Related: Pros & Cons of Financing Rental Properties vs. Buying in Cash
Expected rental income
How much should you charge for rent? Many first-time real estate investors make the mistake of setting a rental price too high for the rental market. It is good to have an idea of what rental income you expect, but it should be realistic for the type of investment property and the real estate market.
A few things to keep in mind:
- Traditional renting usually earns less per month than renting out on Airbnb, but Airbnb has a higher vacancy rate (more on that below).
- The location, type, and size of the rental property impact the rental rate a lot. It is not enough to know that a friend on the other side of town makes $2000 a month. You need to do a rental market analysis and compare your rental property to similar properties in the neighborhood.
- Owning rental property can bring you a high income, but you should not compare it to working full-time. So do not just set a rental amount to substitute your job.
Related: Real Estate Investing for Beginners: A Guide to Neighborhood Analysis
What Else to Consider in the Rent Calculation
Occupancy rate
This metric shows the share of nights (months for traditional renting) booked versus all available nights (months) for a rental. It is never 100% and this is why it is an important element of how to calculate rental rate. Use a property analysis tool like Mashvisor to see actual occupancy rates of any property in the US housing market. And if your rental property is not in our database, you can simply add it to see the available data.
Rental vacancy rate
This is the opposite of the occupancy rate. It is the vacant nights as a share of all nights available (for a single rental property). The rental vacancy rate stands for the nights you would not be earning a rental income. It is about 30% on average for short-term rentals, 45% for vacation homes, and 5% for single-family long term rentals. So when calculating rental rate, you should keep in mind that your Airbnb, for example, will pay X dollars a night only 70% of the time.
Cap rate
The cap rate is the expected annual return on investment. It is calculated as a ratio between the net income (annual rental income minus expenses) and the market value of the property. It shows the rate of return on a rental property you can expect in the first year.
How to Calculate Rental Rate
Now that you know what factors are at play, let’s see an example of how to calculate rental rate for real. We are going to reverse-engineer it.
Let’s assume the following (monthly, traditional renting):
Desired net rental income = $500
Property tax = $100
Insurance = $75
Maintenance = $50
Average vacancy rate for rental comps in your area = 5%
Financing costs = $500
$100 + $75 + $50 + $500 = $725 in expenses
You need this much to cover your costs, but that is not all. Adding the desired profit on the rental property of $500 means you need to charge at least $1,225.
But the rental vacancy rate means 5% of the time you would not be earning rental income. We suggest you add 5% to the rental rate to cover for vacancies.
1.05 x $1,225 = $1,286
This is the answer to the question, “How much should I charge for rent?” in this particular example.
Now, use a rental market analysis tool to compare this rental rate to rental comps. Is it realistic? Is it too low?
Mashvisor’s Rental Rate Calculator
If you do not want to do this calculation yourself, you can use our rental rate calculator to estimate how much to charge for rent – or whether to invest in a certain property at all.
Mashvisor’s Rental Property Calculator
All you need to do is input parameters like financing method, cash investment, and interest rate. The rental property calculator gives you ready numbers for rental income, cash flow, cap rate, one-time and recurring expenses. All of the data is based on rental comps in the area of your investment property. It also compares traditional vs Airbnb data so it is easy to choose the more lucrative rental strategy for your case.
Try the calculator for yourself.
Related: Real Estate Rental Comps: A Guide for Beginner Property Investors
Conclusion
Now you know how to calculate rental rate, taking your expectations and the rental market into account. What is more important, you know that you do not need spreadsheets and months of market research to calculate the rental rate and start earning money.
