Deciding how much rent you want to charge as a landlord is a complicated affair, especially if this is your first endeavor into this space. You want to make a profit, but don’t want to make it so prohibitively costly that no one can afford to live there.
The positive of having tenants is the extra income it provides for you every month. But this doesn’t come without a lot of legwork to make sure you are setting yourself up for success. When setting a price, there are a lot of things to consider.
What Goes into the Calculation?
- Assess Your Property: It’s important to know all the specifics for this space. Things like size, age, and general condition all play a factor. People might be willing to spend more on a place that has more space and is kept up well. Coming into a property that clearly needs a lot of work can translate into a big headache for potential renters. If the price is too high, they might end up walking away.
- Home Features: are also a major draw. Conveniences like an in-unit washer and dryer or a small backyard make a big difference for people. Some are willing to pay more for this, especially if these amenities are hard to find in your area.
- Current Market: You should also understand the current market. See what others are doing in your area, and what about your property makes you competitive. It could be amenities or location, but if nothing stands out, it may have to be the rent itself that sets you apart. Look specifically at the rentals that most resemble your own.
- Location, Location, Location: Often the location is your biggest selling point. You may not have the most space or best amenities, but if you are situated in a desirable location people will pay more. And similarly, if you are far off from popular spots or conveniences, your property’s features might not be as attractive. Big cities are a great example of this. The market is saturated with potential buyers, giving the renters the advantage of being able to increase prices. If you live in an area with a great school district, parents will spend extra to live there.
- Pets: Will you be allowing tenants to bring their pets? Not every landlord wants the damage to their property that a pet will usually cause. If you do allow it, it is typical to build that into the rent to help pay for any damages.
- Who Are Your Tennants: Consider who your possible renters might be. For instance, maybe you live in a small university town. It might be unreasonable to think that students could afford the high monthly rent. But if you live in a prestigious area, you can have more confidence that a high price won’t immediately turn off renters.
- Furnished or Not Furnished: Another possible reason that your property could be worth more is if it comes pre-furnished. Your tenants will be saving a significant amount of time and money by not having to provide their own furniture, which allows you to increase the rent. On the flip side, you may lose certain renters because of this. If a person plans on staying for a long time, they may not want to use your furnishings and prefer to pay for their own. This is another case where it is helpful to know who your potential renters are to understand their needs.
Figure out what your rental yield will be. Your rental yield is what you can reasonably expect your financial return to be after accounting for property value and any expenses you have incurred after turning your property into a rental.
This is done with a simple equation. Take the amount you make annually in rent and divide this number by your property value, then multiply by 100. This gives you the gross yield. If you want the net yield, you will have to subtract from annual income all the expenses that came from the property over the year.
There are a lot of expenses to consider when calculating your net yield. Ask yourself what kind of maintenance was needed throughout the year. Your mortgage and insurance costs will also factor in. If your property was vacant at any point, this should be deducted from your annual rent.
Renting your property can be a rewarding pursuit and help to cover some of your annual expenses. But in order to make your space profitable, you need to know the sweet spot for monthly rent. This can take a lot of consideration to come at the right number, but if enough thought is put in, you could make the endeavor worth your while.