If I offered to sell you a rental property for $100,00, and you had the money and ability to buy it, would you?
Of course, this question can’t be easily answered, unless we understand how much that property would rent for each month. After all, if that property could rent for $3,000 a month, it’s a whole lot better than if it could only rent for $250.
Therefore, accurately knowing where to set the rent is key to both determining whether an investment is a “go” or “no-go,” and maximizing your return on investment.
So, how does one know how to set the rent correctly for a property? Luckily, the process is easier than you might think.
How to Set the Rent: What Is It Worth?
In a theoretical sense, the value of something is not based on what the seller wants, but what the market is willing to pay. In the world of rentals, this means that you do not necessarily set the rental amount—the market does.
Your job is to discover what your market will allow for your rental and attempt to get that amount, known as “fair market rent.”
Discovering what rent amount your market will bear for your property is not difficult; the best way to determine how much your property will rent for is to simply do market research. This means getting out there and finding out what others in your industry are charging.
Rent prices are usually dependent on some the following factors:
- Property type: (apartment, duplex, single-family dwelling, and so on.)
- Number of bedrooms
- Number of bathrooms
- Square footage
- Rental quality
- Extra amenities (laundry, included utilities, yard, and so on.)
- Special features
Your property will generally rent for about the same amount as other properties that are similar to it, in terms of the aforementioned list. While you are unlikely to find an identical property to your own for comparison purposes, you only need to get close.
Finding Comparable Properties
So, how do you find these similar rental properties? Here are a few of the sources I use in my business:
- Driving around while looking for “For Rent” signs
- Calling local property management companies
- Talking to other local landlords
- Local newspapers
For each of these sources, call and speak to the landlord. Ask the landlord questions; you may even pose as a prospective tenant if you wish. This will help you determine how similar the target property is to your own. By doing a little research, you will be able to quickly determine what the going rate is for your type of property.
For example, if you are trying to rent an updated 3-bedroom, 2-bath home, in good condition, it’s logical to assume your property should set the rent for about the same amount as other updated 3-bedroom, 2-bath homes nearby in similar neighborhoods.
You will also want to consider other amenities your competition is offering. Do they include utilities, such as water, sewer, garbage, gas or electric; covered parking or a garage; laundry facilities, such as coin-operated machines; or in-unit laundry hookups? If so—and if you don’t—then your rental price might be lower (and vice-versa).
When All Else Fails…
Remember, something is only worth what a person is willing to pay. So, if after following the above suggestions, your unit is still sitting vacant for long periods of time, consider lowering the rent until you reach a price that people are willing to pay. If you set the rent too high, and no one is biting, it’s better to lower your price and get it filled more quickly, than let it sit for an unknown amount of time.
Brandon Turner is cohost of the BiggerPockets Podcast, a show produced by BiggerPockets.com that features off-the-cuff interviews with investors of various backgrounds, niches, and experience levels. An active investor in Washington State, Brandon is also the author of several real estate books, including The Book on Rental Property Investing.