By Mary Townsend
Don’t go into the process blindly — doing research on rental prices is the key to maximizing profits from your rentals. Learn how to know what to charge.
Figuring out how much to charge for rent each month is a tough question that all landlords ask. Not only do landlords need to know what to charge when they first list the rental property, they also need to keep up to date on this number every time the lease comes up for renewal.
I’ve interviewed experienced realtors, property managers and landlords and have gathered some great tips.
What experts had to say…
- Pricing a rental is more of an art than a science. The best way to do it is to find comparable homes in the neighborhood. But you MUST take the time to make sure you are comparing apples to apples! The homes need to be roughly the same square footage, have the same # of bedrooms, and go to the same school district. — Jake, realtor age 34
- I use listing sites such as Craigslist and Zillow to find other homes that are listed for rent. The problem is if those listings are stale and have been sitting there for awhile, then they give an inflated view of what market clearing rent prices are. A lot of Airbnb listings are overpriced and don’t get rented, for example. If you based your rent off what other listings are at the time, you’re making a mistake— Mel, realtor age 44
- Looking at the prices on rental listings on Craigslist and Zillow don’t work for me. Some landlords in hot markets advertise low prices but the price that the homes ultimately get rented out at are higher than that. It’s like when homes get bid up in a sale. — Peggy, property manager age 53
- I use a website called Rentometer.com, it has this nice little graphic that tells me if the rent I’m charging is in the red or if it’s reasonable. — John, property manager age 43 (author’s note: I tried this website and it worked for some of my properties but was way off on others)
- Neighbors are good sources of rental price information. But you have to remember that if you ask a landlord who is just too nice and hasn’t raised rent for years, that that data point won’t be helpful. Ask a lot of neighbors and find something in the middle that works. — Amy, landlord age 33
After my interviews, I realized there is no secret formula unfortunately for calculating rent prices. So should you start with something high and then lower it? Or vice versa? Its possible to experiment with rent prices until you find one that clears the market. The risk though is that you may miss out on a really great tenant that is price disciplined, or worse yet, that the opportunity cost of rent makes it a bad financial decision.
Understanding the opportunity cost of mis-pricing rent
- Lets assume you have a home that clears the market with a rent price of $4,000 per month.
- If you accidentally overprice it at $4,300 you might be making an extra $300 per month, which adds up to $3,600 in rent income per year.
- However, if this overpricing causes a four week delay in renting out your home, that’s $4,360 (four week’s worth of rent) of rental income that you’re losing out on! This means if you’re targeting a 1 year lease, that extra $300 per month cost you $760 ($4,360-$3,600).
Remember, in rentals, time is money.
So should we price rent lower so that we can rent the house out ASAP? That isn’t a good strategy either. In general, you never want to be too rushed in renting your home out because it probably means you aren’t doing enough to screen your tenants.
Also, starting out at too low a monthly rent makes it harder to add on a very big rent increase the following year, after the lease is up for renewal. Remember, even if your new price is market rate, tenants will always think of rent increase relative to what the price once was.
Here’s what works for me
It takes some planning and effort, but I’ll tell you what works for me.
- I gather all the data points I can, from Zillow, Craigslist, Hotpads, neighbors, coworkers, and then I talk to friends who live nearby — for these homes, I write down the address, # of bedrooms, square footage and rental price.
- One or two weeks later I look to see how many of those are still listed, and filter my comparables list to just those homes that were rented out quickly.
- I look at the photos of those rentals, and compare the quality of build and general attractiveness of those units relative to mine (open floor plan, natural lighting, updated kitchen or bathroom, large closets, etc.).
- If the rental is in an apartment complex, I look for active realtors who have sold a unit in that complex recently and ask them for their data points.
- With all of that information, I’m generally able to come up with a monthly rent price that I feel is fair and clears the market.
Now remember, your rental income should ideally cover all of your rental expenses, including maintenance, insurance, property taxes and HOA fees, if any. I highly recommend finding an expense tracker like Tellus that’s made just for landlords and tenants so you can have a clear picture of whether your rental is actually generating positive cash flow for you after all the costs are factored in. If so, fabulous!
While there is no specific formula for rent (even the top performing realtors will admit to this), landlords can put themselves in the best position by doing a little bit of research and revisiting the rental price annually.
The half hour it takes to find good rental comparables can result in thousands of dollars in additional rental income cash flow per year!
Now that’s some good return on investment for your time.