How To Price Your Rental
Whether you’re about to pull the trigger on a new MULTIfamily investment property or already own one, you’re faced with a critical question: How do you know how much you should charge for rent?
In this article, I’ll tell you how to make the best decision. I’ll also discuss why that decision is so important.
Can you figure out what’s reasonable rent on your own?
Yes. All you need is access to a computer.
You can either figure out how much rent to charge by yourself, or you can enlist the help of an experienced property manager. Read on to learn how to do it on your own and learn about some things that might cause you to want to hire a pro.
Why do you need to get the rent right?
Obviously, rent is the source of your income from your MULTIfamily rental property. Furthermore, the amount of rent you charge will influence the number and quality of prospective tenants you attract.
You should expect to clear about 5% of the rent after paying your mortgage, insurance, real estate taxes, and routine operating expenses. Consequently, you need to invest in a property that will generate enough income to make it worthwhile.
It’s mostly about the comps.
“Comps” is Real Estate jargon for “comparable properties.”
Usually, the leading motivation for investing in MULTIfamily rental property is that you expect to make a return on your investment in terms of passive income. Passive income comes from the amount of rent that you collect.
It’s important to know your market because when you invest in MULTIfamily rental property, you’re competing for customers with other property owners.
Situations vary, but as a rule of thumb you should expect to target your rental price no more than 5% higher or lower than your competition. But what’s that number?
You want to get this right. If you get greedy and go too high, it may take longer to rent your property, or you might not rent it. In either case, you have periods with no income. If you go too low, you’re leaving money on the table that could be in your pocket.
You need to answer two critical questions:
- Which rental properties in the area are like yours?
- How much are people paying to live in properties like yours?
Where can you find comps?
You’ll have no problem finding comps. You can go to most Real Estate websites to look at your competition. Two of the most popular websites are:
What to look for in comps?
Researching comps is simple.
Websites have filters that you can apply when you look at properties that are most like the one for which you’re trying to determine a winning rental rate. For instance, if your property includes garage parking, you’d select “garage” as one of your filters.
You want to focus your search radius to include properties within 1 or 2 miles of your property, depending on the number of rental properties in the area. If there are a lot of properties, stay within one mile. If there are fewer, you might have to search farther out.
These are the most important things that renters look for:
- Square footage. Size matters and everyone has preferences that must be satisfied. When filtering for rentals with comparable square footage, it’s advisable to look no more that 10% larger or smaller than your property because people will usually accept this range.
- Number of bedrooms and baths. Look at properties offering the same as yours.
- Amenities. You want to make sure that you’re looking at properties that offer amenities like the ones that you’re offering, so filter accordingly. Examples include:
- Laundry – inside the unit, common, or none.
- Parking – garage, covered, or open lot.
- Yard – fenced and private, common, or none.
- Swimming pool – private, common, or none.
Once you have your list of comps, you can see what they are getting for rent. You can usually charge between 95% and 105% of what the competition is charging. How much higher or lower? That depends on other tangibles and intangibles about your property.
What the comps don’t tell you
It’s easy to research comps and use your research as a starting point for determining the amount of rent you can charge for your property. In some cases, it may suffice to give you the confidence to buy the MULTIfamily property and set your rent rates.
But there are additional factors that are a little more difficult to learn. Depending on the needs and preferences of your renters, these can include:
- Is it an attractive neighbourhood that draws renters?
- Is the crime rate low?
- Are properties well-maintained?
- Are there good schools nearby?
- Are there attractive stores nearby?
- Are retailers and schools within walking distance?
- Is there easy access to medical professionals?
- Is there access to public transportation?
- Why use a property manager to select property or set rental rates?
I’ve established that you can rely on your own research, instincts, and business savvy to find a good MULTIfamily rental property investment and to establish the correct rent. I’ve also mentioned some of the things that comps don’t tell you about property and its rental value.
An experienced property management company has its finger on the pulse of the market. They stay up to date on things that you can’t learn on your own, that can help you determine the current amount of rent to charge to optimize your return on investment. These include:
- Intimate details about the neighborhood.
- The lifestyle options available to residents of the neighborhood.
The trend in Real Estate values
What other benefits when hiring a property manager?
Your ideal property will be in an area where all these factors are positive and trending up. This enables you to expect that you can increase rents (and your income!) over time, and that the value of your property will increase.
It’s important to consider the appreciation of your property. The average MULTIfamily property investor sells the property after six or seven years. The most common reasons are:
- Cashing out. The equity in the property can provide considerable cash for a new home, retirement, education expenses, medical expenses, or anything you can think of that requires a considerable sum of cash.
- Expanding their multi-family Real Estate portfolio. The equity in their property can be used to purchase additional property. Best of all, as a rule there are no capital gains taxes on the sale of the first property if the money is used to purchase another property. You can grow your income and personal wealth one property at a time.
Setting the correct rent rate for your MULTIfamily rental property involves both science and art.
The science is simple, and you can do most of it yourself by studying comps to confirm the going rate for a property like yours. Depending on the features of your property, you can usually peg your rate within a range that’s 5% lower or higher than the competition.
The art is another matter. Experienced property managers like getMULTIfamily.com know the nuances and trends of the Real Estate market and are tuned into helping investors maximize their return on investment.