Determining exactly how much you should charge for rent can be tricky. You want to run a business that’s profitable for you, but you also want to give tenants a fair deal that they can comfortably afford.
Whether you’re a first-time landlord or not, there’s always the risk of overpricing or underpricing your rental property — neither of which are good.
If you set the price too high, you’re likely to have trouble finding tenants. And, if you set the price too low, you’re not maximizing the value of your asset.
There are many different factors to consider that will help you decide how much to charge for rent.
How to calculate how much to charge for rent
Look at the competition (other rental properties in the area)
One of the first things you should do when determining how to price a rental property is look at what other similar properties are asking for in your local area.
You can typically find the cost to rent a house or an apartment in your area on real estate websites or local classified sites, such as Craigslist.
When you’re doing this research, don’t just look at the size of your competitors’ properties. Look at other factors like amenities, number of bedrooms/bathrooms, the year the property was built, proximity to public transportation, and other distinguishing features that you can use to compare different properties to yours.
Make a list of properties that seem quite similar to yours and take note of how much their landlords are charging.
Property value (does the 2% rule really apply?)
If you ask anyone with knowledge of real estate “how much should I charge for rent?,” one of the first things they will likely tell you is to use the 2% rule to price your rental property.
The 2% rule dictates that the amount of rent you charge should be equal to approximately 1-2% of your property’s value.
While this is a good rule of thumb to use, it doesn’t factor in all of the other things you need to consider in order to set a fair rental price, so it’s best not to rely on this rule alone to set rental rates.
Costs you have with renting out the property
Whatever rent price you decide to set, you need to make sure it covers all the overhead expenses you have that are associated with the property.
For instance, factor in estimated property/unit maintenance costs, which are typically about 1% of the value of your property per year.
If there are any utilities that your tenants won’t pay directly themselves, make sure to charge an appropriate amount of rent to cover those services.
Other costs associated with renting out a property can include:
- HOA fees
- Landscaping costs
- Shared amenity maintenance/utilities
- Employees (e.g., paying a building manager)
The seasonality impact
Demand for rental properties changes throughout the year and is typically higher during the summer months, when college students are looking for places to live and when many families prefer to move.
This means that you may be able to charge slightly higher rental rates from about April through August, asking the highest rates during July and August when demand usually peaks.
The impact of the market demand
Along with changes in seasonal demand, there can also be changes in the overall market demand that affect how much you can rent a house or apartment for.
For example, during tough economic times, there may be more people looking for homes to rent because they can’t afford to buy a home, so rent prices might go up.
A booming local economy can also increase a city's population and demand for rental properties, which can also allow you to set higher rental rates.
Or, maybe a high rate of new construction in your local area has made the supply of rental units higher than the current demand, so rent prices go down.
Make sure to always keep an eye on local market demand to know how much you should charge for rent at any given time.
Other factors to look at besides the actual property
If your rental unit comes with a parking space, this is something that you could highlight to set higher rental rates than your competition. Covered parking or garage parking is something that people with vehicles often greatly value.
The safety of a neighborhood is also something that impacts what people are willing to pay for rent. If the neighborhood your property is located in is safe and walkable, it will be much more desirable to prospective tenants and they will be willing to pay more.
Building facilities for apartments/condominiums
If your rental property is in a multi-unit apartment or condo building, the shared facilities are also something you can factor into the rent value of your unit.
For instance, if there is a gym in the building or a nice shared outdoor space, such as a rooftop terrace, these can allow you to set higher rent rates than units in buildings with no amenities can charge.
Distance to schools/stores/public transportation and other attractions
Different types of renters look for proximity to different locations in their rental homes. For example, families with children may be willing to pay more for a home close to good schools.
Or, young professionals who work downtown and take public transportation to work might be willing to pay more for a place close to a bus or train station.
Nearby grocery stores, restaurants, and other commercial facilities also increase the value of rental properties. Other perks include parks and athletic facilities that tenants could potentially make use of.
Rent control areas
If you live in a state that has rent control laws, make sure you know the local rules and regulations. Rent control laws mainly govern how much you can raise rent for existing tenants when you’re renewing their lease, but there may be other guidelines. The states with rent control laws are:
- New York
- New Jersey
- District of Columbia
Whether you live in California or another rent-controlled state, do your research and ensure you understand all the ins and outs of the rent control laws in your state before deciding how much to charge for rent.
Why it’s so important to price the rental correctly
Along with tenant screening, setting a fair rental price for your rental unit also helps you find the right tenants who you can hopefully build a long-lasting tenant-landlord relationship with. Correctly priced rentals also tend to spend the least time vacant, so you can minimize rent loss.
- The 2% rule is a decent guideline, but other factors like local market demand, seasonal demand, competition, and associated costs are just as important as property value when deciding how much you should charge for rent
- Highlight your property’s facilities/amenities and perks like proximity to shopping, schools, and public transportation when you list your rental
- Make sure you know the landlord-tenant laws in your state, particularly regarding rent control if you live in California, New York, New Jersey, Maryland, Oregon, or the District of Columbia
If you set the correct rent value of your home, you should have no trouble keeping it occupied with good tenants
- After you’ve priced your rental correctly and found new tenants, make sure to use a landlord-tenant checklist before they move in to document each party’s responsibilities and the condition of the property upon move-in.