One of the most important decisions you have to make as a rental property owner is setting the right rental price to charge your tenants. It helps you earn a steady stream of income and maximize your real estate investment.
Your pricing has to be strategic. On the one hand, the number you settle on should help you reach your profit goals. On the other hand, the rental price shouldn’t be too high that you run the risk of pricing yourself out of the market.
The 1% and 2% rule
Despite its name, the so-called 1% or 2% rule are not standard practices in determining a property’s rent price. This guideline is mostly used by property investors looking for the most profitable investments in a market.
But what is it? It’s basically a quick calculation to see if you can profit from a certain property. The 1% rule entails charging a rent price that is 1% of the property’s purchase price. Make that 2% if you’re following the 2% rule.
When it comes to pricing your rental unit, several factors come into play. These factors include the following:
Your property’s market value
Rent prices in the area
Your rental property’s condition
Amenities and utilities
A good first step in determining your monthly rental price is getting an estimate of your property’s market value. It is good to get an update on your investment’s worth because your property might have already appreciated or depreciated since you bought it.
You can o get an estimate on various real estate websites like Zillow. The most accurate assessment, however, would always come from a professional appraiser. Note that if you’re following the 1% or 2% rule, your property’s current estimated value will have a significant effect on the rent price.
Competition should be your first consideration when figuring out a fair price for your rental.
Start your search online and zero in on properties in your neighborhood that are similar to yours. How much are they charging? Take note of these figures to come up with a reasonable rent price.
How does your rental property stack up against the other rentals in your area? Does it have a better view? Does it have hardwood flooring? Is it bigger than most apartments in the neighborhood? Are the appliances and other features of the unit updated? Is your rental older? Tenants are more willing to pay top dollar for new construction with better amenities.
Answering these questions can help you adjust your ballpark figure accordingly. It is also a great way to figure out possible renovations that boost your property’s rent price.
Real estate market conditions as well as the economy’s health can affect rental demand and, in turn, rent prices.
To determine a fair price for your unit, pay attention to what the economic climate demands. How is it affecting the real estate market? Keep tabs on the changes in your neighborhood’s housing prices and go with the flow.
If home prices and housing demand are rising, you can consider a higher price tag for your rental.
The amenities and utilities included in your rental property play a significant part in determining a realistic ideal rental price. These features help justify a higher price tag. As such, some property owners take the opportunity to provide a lot of add-ons, from internet connection to off-street parking.
That said, more features don’t always result in a higher rental price. Find out the must-have amenities renters in the area are looking for and see if you can offer those.
Your property’s rental price should not only turn a profit; it should also help you maintain the place and take care of monthly expenses. Take costs like mortgage payments, insurance, emergencies, and property taxes into consideration as you set the rental price.
The rent that you charge your tenants should cover these expenses on top of your profit margin. It is a balancing act to figure out the right price, but the main goal is to remain in the black.
Is the price right?
Whether you are new to owning rentals or have a vacancy in your longtime real estate investment, the factors above can help you determine a reasonable rent price for your property.
Sundance Property Management can help you set the right price or expand your portfolio in several US real estate markets. Let our two decades worth of combined experience help you reach your rental and profit goals. Contact us today at 608.513.3933 or email info(at)sdpmi(dotted)com.