WHAT SHOULD I CHARGE FOR RENT?
What should I charge for rent is a question I get asked all the time. There are right ways and wrong ways to determine what you should charge. A home sitting empty could cost you thousands of dollars a month in lost rent. To minimize those losses and to maximize the success of your rental, you want to make sure your rental is priced correctly.
How much rent should I charge compared to my mortgage?
Determining the rental price based on your expenses, does not determine what you can charge for rent. What you can charge is determined by the current market. Your mortgage payment taxes, management fee and HOA fee are very relevant to your budget, but they are not relevant to what your home will rent for. Instead of thinking how much rent should I charge compared to my mortgage, look at the market and determine if you can afford the rental property based on what it will rent for.
Should you buy a property with a negative cash flow?
What do you do if your property has a negative cash flow? Is it a bad investment? No, real estate handled properly is still a great investment. To learn how profitable real estate can be, even with a negative cash flow, see our other video. Is it a Good Time to Buy an Investment Property ?
Should I Charge Below Market Rent or Above?
Charging top dollar in order to make more money. The problem with this strategy is that you actually make less money, because the home took longer to get filled. To illustrate my point consider this scenario, let’s say you determine your property will rent somewhere between $2,000 and $2,200 in hopes of making more money you advertise for $2,200 that being the case, if it takes let’s say 7 weeks to get filled you will have lost $3,850 in rent during the time it was empty. If you subtract the lost rent of $3,850 from what you should make in a 12-month period with paying tenants you made a total of $22,550. If, however, you advertise the rent at $2,000 it may only take half a month to get filled during that half month that it sat vacant you will have lost a total of $1,000 in rent if you subtract the lost rent of $1,000 from what you should have made in a 12-month period with paying tenants you will have made $23,000 instead of the $22,550 you would have made at the higher rent price. Imagine you took it even one step farther and listed your property as the lowest price on the market at $1,975 it might get filled right away but let’s say it still took one week or roughly a quarter of a month to get filled you will have lost $494 during the week it was empty and after subtracting that from a full 12 months of rent you will have made $23,206 that’s a difference of over $650. Given these scenarios you might make more money by getting it filled faster at a lower price than you do trying to get top dollar. Remember you aren’t locked in at that rent price forever, after the lease expires in 12 months you are able to raise the rent. If the market will let you.
Myth: Higher Rent Means Better Tenants
There is a myth in the real estate industry that higher rent means you attract better tenants. However, consider this, imagine you are out looking for a rental property. Would you only look at homes at the high end of the market because you plan on being a good tenant? Not likely, in fact I’ve seen the opposite. The people that are desperate and willing to pay anything are usually the ones that apply when a property is priced high, and desperate people usually don’t make great tenants. What attracts the most prospects is a great home at a competitive price. An owner should certainly want to rent to a good tenant, but this is achieved by following effective application screening practices. Not by charging higher rent. See our videos Top 7 Red Flags to Watch for When Screening Tenants for Rental Properties .
How to Determine the Market Rate for your Rental Property
#1: Look at classifieds and websites that are specifically for advertising rentals. When you do this, remember this is what people are asking for and not necessarily what they are getting. Usually you can disregard two to three of the highest priced ones, most prospective renters will do the same. Then see if there are any other rentals that could be ruled out as a bad comparable because of their location, square footage, upgrades, etc.
#2: If it is possible and seems appropriate, talk to people in the neighborhood that are renting and find out what they are charged. it might be helpful information. Remember however that it is limited in its usefulness because the rental market may have shifted during the time since they moved in.
#3: Once you find a list of good comparables, it’s easy to focus on those that are higher priced, however, it is even more important to take a close look at the lower price rentals. These are the ones that will be pulling prospects away from your listing. Ask yourself: why are they priced as low as they are, how are they different from your property, and can your listing distinguish itself from these in a noticeable way? For example, are the lower price listings in an older part of town, or too far out of town? In this case, can you distinguish your listing by focusing on the quality of the neighborhood or where it’s closest to schools and stores. Use this information to help you narrow down your range even more, then consider listing your rental on the lower end of that range in order to be competitive and reduce vacancy time.
#4: After only a couple days of being listed you should be seeing two to three contacts a day that are interested in your property, any less than that and you are likely priced too high and it may sit empty too long. This is the most important measure to determine if you are priced right. You only need 1 to 2 days to see how it’s going. An empty rental is far too expensive to waste time by not adjusting the price when the market is telling you that you should.
If this seems like a lot of work, it can be, but at Kasteel Property Management we have 18 years of experience and are able to quickly help our clients find the right rental range for their specific property. We do more than just watch your rental property we protect it cultivate it and help your investment grow.
