What to charge for rent is one of the most important questions in real estate, and the best way to find out is to use a rental rate calculator.
The profitability of a rental property is driven by three main factors:
- The property price
- The rental income
- The rental expenses
That’s why figuring out exactly how much you should charge for rent is crucial. This holds for both long and short term rental properties. In the first case, the rental rate is the monthly rent, while it’s determined daily in the second.
Table of Contents
- 3 Methods to Calculate Rental Fees
- Rental Rate Calculator: The Most Efficient Way to Calculate How Much Rent to Charge
- What Is the Best Rental Rate Calculator?
If you charge too much for rent, you risk having a vacancy that’s too high while you still need to spend money on maintaining your income property resulting in negative cash flow. If, alternatively, you charge too little, you’ll be leaving money on the table, so your cash on cash return and cap rate will be suboptimal.
This raises the big question: What’s the best way to decide what kind of rent you should charge for your investment property?
In this article, we will look at three different ways to calculate rent for both long term and vacation rentals. We will go over the advantages and disadvantages of each method.
Then, we will examine how using a rental property calculator can help boost your decision-making process and lead to better ROI. We will also discuss why Mashvisor has the best rental income calculator in the US housing market.
3 Methods to Calculate Rental Fees
The rental fee, or rate, is how much a landlord or an Airbnb host charges tenants or guests to occupy their property for a month or a day, respectively. For long term rentals, the rental fee is equivalent to the monthly rental income. With short term rental properties, on the other hand, the monthly rental income is the product of the average nightly pricing and the occupancy rate.
The importance of answering the question “How much should I charge for rent?” precisely is based on the fact that it is present in all formulas for return on investment in real estate. Whether you use the cash on cash return metric or the cap rate measure, the rental rate is in the formula.
There are three main methods to decide how much rent to charge for a house to optimize profitability.
1. Using the 1% Rule in Real Estate to Estimate Rental Rate
One of the most widely used ways to calculate a rental fee is by using what is called the 1% Rule in real estate investing.
What Is the 1% Rule?
The 1% Rule is a basic rule in real estate investments, according to which an investor should set the rental rate to be equivalent to 1% of the purchase price of the rental property. It refers to the rental income per month.
Some experts say the realistic range is between 0.8% and 1.2%, with some going as high as 2%. But charging rent equal to 1% of the property sale value is usually enough to cover the recurring expenses and secure positive cash flow.
The beauty of the 1% Rule in real estate is the simplicity of the formula and its calculation.
What Is the Formula to Calculate the Rental Rate Using the 1% Rule?
Using the 1% Rule, here’s how to calculate the rental fee:
Rental Rate = 1% x Property Purchase Price
Applying this rule of thumb to investing in long term rental properties is easy, and you don’t need a rent calculator to compute how much to charge your tenants. All you have to do is calculate 1% of the home value, which should be the monthly rental rate. If the rental market analysis shows substantial vacancy rates in your area, you’ll need to factor potential vacancies into your calculation.
For example, let’s say you buy an income property for $200,000 and expect a 10% vacancy rate. The rental fee you charge renters should equal 0.01 x 1.1 x $200,000 = $2,200. The extra $200 per month on top of the 1% of the property price is needed to compensate for expected vacancies while still getting a good rate of return.
Calculating the rental rate of short term rentals using the 1% Rule is a bit more complicated, though. It’s because the Airbnb occupancy rate is not a single number but fluctuates from week to week and from month to month. So, you will need to find a reliable estimate of the expected average short term rental occupancy rate before using the rule.
Once you have the estimated occupancy, things get straightforward. Suppose you purchase a vacation rental that costs $300,000, and the local occupancy rate is 60%. It means a vacancy rate of 40%. You should aim for a monthly rental income of 0.01 x 1.4 x $300,000 = $4,200. Then your Airbnb daily rate should be $4,200/30 days = $140/day.
Pros of the 1% Rule
This method of calculating rental fees has a few important benefits, including:
- Simple: The best thing about the 1% Rule in real estate is that it is extremely easy and straightforward to calculate. Unlike other approaches and formulas, it doesn’t require inputs that are hard to come by. All landlords and Airbnb hosts need to know the property purchase price.
- Proven: Real estate investors have used this rule for many years and have proven its worth in rental property investing.
Cons of the 1% Rule
Like any other strategy in real estate investments, the 1% Rule has some shortcomings, which include the following:
- Overly simplistic: While it is definitely simple, this method is actually overly simplistic. It’s too naive to consider that profit is based purely on how much you buy your rental property for.
- Inflexible: The 1% Rule doesn’t consider factors like local rental expenses and tax rates, local demand, comparative rental rates, rental strategy, and financing method. Each of these has a major impact on ROI in real estate. For instance, managing a long term rental costs much less than running an Airbnb business.
- Outdated: This rule does not take into account the fact that things change over time. If you bought your property a few years ago, rental expenses (and even tax rates) have likely increased since then. It means that 1% of the purchase price might no longer be enough to cover monthly costs and run a profit.
2. Using Rental Comps to Calculate Rental Fees
The second way to evaluate how much rent to charge for your investment property is with the help of rental comps.
What Are Rental Comps?
Rental comparables, or rental comps, refer to comparable rental properties in the same area where your income property is. Comparable means these existing rental listings have similar sizes (square footage, floors, and rooms), features, finishings, and amenities.
For example, let’s say you own a 2,500-square-foot single-family home built in 1980 with a veranda and a swimming pool. It doesn’t make sense to use a nearby 1,800-square-foot apartment built in 2010 with no access to a swimming pool to decide on your rental rate.
How Is Rental Property Value Calculated Using Rental Comps?
Once you find a few rental properties that are comparable to yours, you should see what rent they ask for. Of course, these rentals must be occupied; if they are vacant, it’s very likely that the fee they are trying to charge is too high.
Then, you should account for any differences between your rental property and these comps to adjust your rental rate to the best possible value. After all, no two properties are absolutely the same.
All this sounds great, but it prompts a major question:
Where Can You Find Rental Comps?
Rental comps can be located in a few different ways:
Traditionally, real estate investors used several approaches to find rental comps.
One way to do that is to resort to your network of fellow investors. It’s important to build and maintain a solid real estate network of investors. It includes people investing in different property types and different rental strategies in the market where your investment properties are.
You can ask around to see what rental fee they charge for properties similar to yours. To reap success with this approach, you must maintain good relationships with those who invest in similar rentals in the same location as you.
Another way to find rental comps is to look through rental listings in local newspapers. You should try to locate a few properties similar to your rental property and see what rents they are asking for. The trick is to focus on homes that get rented out quickly. If they stay on the market for too long, chances are that they are asking for rates that are too high for the area.
Yet another method to figure out the local rental rates is to talk to renters rather than landlords. If you know people renting in your neighborhood, you can check out how much they pay for rent. While this will work for long term rentals, it is not feasible for vacation rentals. You can’t just go around asking tourists how much they pay for their Airbnb.
Since the eruption of real estate technologies, you can check out rental websites and search for comparable long term or short term rentals in your location. That’s arguably the most efficient way to find rental comps and answer the question, “How much rent can I charge?”
The question remains, though, where to find reliable rental listing websites. In other words, how do you know if you can trust the data provided by a specific website?
We will get to this shortly. For now, we’ll just mention that it implies using the best rental calculator on the market.
Pros of Rental Comps
The advantages of using rental comps to find out the rental rate include the following:
- Reflective of local market conditions: Rental comps consider local factors like rental supply and demand, taxes, operating costs, seasonality, etc. If other investors can charge specific fees and generate a good return on investment, you should be able to do the same.
- Up to date: How much comparable properties charge for rent reflects the current market. Using rental comps, you can update your rental fee as needed. Of course, you must consider local rent control policies.
- Applicable to short term and long term rental properties: With rental comps, you can calculate the right rental rate for both rental strategies in the same way.
Cons of Rental Comps
Meanwhile, the main drawbacks of basing your rental fee decisions on rental comps include the following:
- Time-consuming: Finding reliable rental comps can take a lot of time. Unless you have proven sources of short and long term rental data, you might need to spend weeks locating comps and learning how much they charge for rent.
- Data-dependent: Your rent estimate when using rental comps will be only as good as the quality of the data sources that you’ve used. So, having access to accurate rental data is vital.
3. Using Rent Zestimate to Find Rental Income
The last method real estate investors have been using to set up the rental rate of their investment property is relying on the Rent Zestimate. Many beginners think that Zestimate refers only to the current market value of a home. However, there is also the Rent Zestimate, which is related to the rental rate of a property.
What Is Rent Zestimate?
The Rent Zestimate is a value provided by Zillow which estimates the rental fee a landlord should charge for their income property. It is supposed to be based on the performance of similar rentals in the area, which means that it should be accurate and reliable.
However, online Zillow reviews highlight the inaccuracy of the Rent Zestimate, so investors cannot really rely on this metric alone when deciding how much to charge for rent.
Pros of the Rent Zestimate
Utilizing the Rent Zestimate to evaluate rental rates has one main advantage:
- Readily available: The Rent Zestimate gives real estate investors quick and easy access to the rental fee they should charge for their income property. It’s equivalent to getting immediate access to rental comps data.
Cons of the Rent Zestimate
The cons of setting rent with the help of this metric are:
- Inaccurate: A major concern is that many landlords find Zillow’s estimates of local rental rates to be inaccurate. If you base your decision on how much to charge for rent on a single inaccurate number, your cash flow and overall return will be compromised.
- Inapplicable to short term rentals: While the Rent Zestimate might sometimes work for long term rentals, it cannot be used for calculating the rental rate on vacation rentals. As Airbnb rentals bring significantly higher returns than their long term counterparts, investors will miss out on major opportunities.
Rental Rate Calculator: The Most Efficient Way to Calculate How Much Rent to Charge
As all three ways of calculating rental rates mentioned above have flaws, the question “How much rent should I charge?” remains.
The most efficient way to answer this question is to use a rent charge calculator.
What Is a Rental Rate Calculator?
It is one of the must-have real estate investment tools in 2023. This is a variation of the investment property calculator, also known as the rental property calculator. This calculator helps investors set up a suitable rental fee for their income property.
A good rental analysis calculator should use big data from multiple, proven, trustworthy sources and cover the entire US real estate market. It should rely on AI and machine learning algorithms to analyze this data and produce high-quality rental analytics. Moreover, the best rental income calculator should work with both short term and long term rentals.
What Is the Best Rental Rate Calculator?
You can find the top rental income calculator for 2023 right here on Mashvisor. The Mashvisor platform comes with an in-built calculator that helps investors figure out the optimal rate to charge for their long term and Airbnb rental properties. It means that our tool works as both a long term rental calculator and an Airbnb calculator. The latter works really well for Airbnb analytics.
Indeed, Mashvisor features a comprehensive real estate investment ROI calculator that provides more metrics than just the rental rate.
Airbnb Rental Calculator
What Data Do You Get With the Mashvisor Calculator?
Here are the real estate metrics you can access with the Mashvisor investment property calculator:
- Property price: This includes both the listing price and the Redfin valuation.
- One-time startup costs: Home inspections, repair costs, furniture, appliances, and closing costs are all factored in.
- Comparable rental income: This is the monthly rental income investors can generate for similar properties in the same market.
- Recurring monthly expenses: These costs include insurance, utilities, property management, maintenance, property tax, HOA dues, rental income tax, and cleaning fees.
- Occupancy rate: This shows the proportion of time a property is rented.
- Cash flow: This is calculated as the difference between gross rental income and rental expenses.
- Cash on cash return: This is the most comprehensive measure of return on investment in real estate investing, taking into consideration the method of financing.
- Cap rate: This is one of the easiest ways to calculate return in rental property investing.
- Financing metrics: This section differentiates between paying for your property in cash vs mortgage. The measures include the down payment, mortgage type, loan term, and interest rate.
- Investment payback balance: This shows how long it will take to break even on your property.
When searching for investment properties for sale on Mashvisor, each listing comes with readily available rental property analysis. It comprises all the data and analytics listed above, including the rental fee.
Furthermore, if the property is not listed on Mashvisor, you can enter its address and access the same level of analysis. It means you can find the best rental rate for any residential property in the US market quickly and efficiently.
Where Does Mashvisor Get Its Data?
To know if you can trust any real estate investing tool, you need to know where its data comes from. After all, a tool is only as good as the data it uses.
With the Mashvisor rental property calculator, investors can rest assured that they are in good hands.
Our platform obtains real estate and rental data from dozens of publicly available, reliable, verified sources. These include the MLS, Airbnb, Redfin, Zillow, HotPads, and public records. All data is cleaned, organized, and analyzed by our experienced Data Team. Calculations are done based on AI and machine learning techniques.
Why Is Mashvisor the #1 Rental Rate Calculator?
Calculating rental rates with the help of Mashvisor provides the following benefits:
- Accurate: The estimated rental fee is based on the performance of actual rental comps in the local market and reflects both historical and current data. All numbers are constantly updated to show the most up-to-date investment property analysis.
- Reliable: The platform gathers real estate and rental data from reliable sources before undergoing robust analytical processes.
- Available for all markets: Mashvisor offers nationwide real estate market coverage, including anything from the largest cities to the smallest communities.
- Applicable to both rental strategies: The platform provides the same level of analysis for both short term and long term rental properties. All numbers are displayed side by side, so investors know how much they can charge for rent if they ever decide to change their rental strategy.
- Easy to access: To find out what rent to charge, investors can click on one of the listings available on Mashvisor or enter the address of their property. They get access to the comparable rental income of the property they’re analyzing with a few clicks of a button.
- Able to find investment opportunities: Mashvisor allows you to analyze specific properties and search for profitable rental properties for sale. You simply enter your criteria, and the Property Finder will show you a list of properties meeting your requirements. For each, you get a rental rate estimate and a comprehensive ROI analysis.
- Time- and cost-efficient: Mashvisor has turned three months of research into 15 minutes.
Airbnb Dynamic Pricing
While pricing a long term rental is serious business, things are even more complicated with a vacation rental. Airbnb hosts need to apply what’s known as dynamic pricing in order to remain competitive in the local market. It means they need to charge a different rate each night to reflect changes in supply and demand.
Mashvisor has recently launched a new tool that takes care of this: The Mashvisor Dynamic Pricing tool. You can connect your Airbnb listings directly to your Mashvisor account to have our tool calculate the best daily rates for you. The tool looks at the nightly rates charged by competitors in the area and their performance to suggest the most appropriate rate for your property.
Two things make this tool particularly helpful. First, unlike the Airbnb Smart Pricing and the AirDNA Smart Rates, the Mashvisor Dynamic Pricing tool maximizes income and ROI, not occupancy. Second, you can allow the tool to automatically adjust your daily rental rates on the Airbnb platform without your intervention.
Final Words on Rental Rate Calculations
Like many other things in real estate investing, calculating how much to charge for rent for a house used to be complicated and time-consuming. However, tech advancements have made the process much easier and faster for both beginner and experienced investors.
Namely, the development of the rental rate calculator allows landlords and Airbnb hosts alike to decide what rent to ask for within minutes. It eliminates the need for manual data collection, analysis, and complex calculations.
And if you’re searching for the best rental income calculator in the US market, this is Mashvisor for all the reasons listed above. Most importantly, Mashvisor uses data from multiple proven sources before applying algorithms powered by AI. In addition, it covers all US markets and both rental strategies.
Furthermore, it doesn’t limit the analysis to rental fees only but also provides estimates of all crucial investment metrics like cash flow, cash on cash return, and cap rate. Last but not least, the platform is very intuitive and easy to use.
To learn more about how Mashvisor can help you set up rental rates for short term and long term rental properties across the US, sign up for a 7-day free trial now, followed by 15% off for life.