Learn how to calculate the ideal rent amount that’s profitable for you and attractive to tenants.
As an investor, you want to make as much money as you can from your rental units. But finding that sweet spot of investment profitability and market-attractiveness rent is not always easy, especially if you’re new to landlording or are expanding your rental portfolio into new markets.
Ideally, you want your rent amount to reflect market conditions to get the best returns. However, tenants are naturally price-sensitive and will compare your property to many others. Therefore, if you set your rent too high, no one will consider renting from you. On the other hand, if you put it too low, you won’t earn enough to pay off your mortgage and still generate positive cash flow.
So how do you figure out the best rent amount to charge?
I’ll show you one easy way to estimate rent based on how much you paid for the property. Then, I’ll take you through the full rent amount assessment process to accurately determine your ideal rent amount.
What’s an Easy Way to Know How Much Rent to Charge?
Use the rental yield formula to estimate what rent amount makes the most financial sense. You’ll need to plug in the average gross rental yield (of your state or area) and your property purchase price in this formula to see how much rental income you should ideally generate:
Let’s see how this works with actual numbers. Using the national average gross rental yield of 2.85% and a property price of $650,000, you should charge an annual rent of $18,525 (or $356 per week):
However, this simple calculation only considers what’s financially sound for you, and does not consider the other competitors in the area, local price variations, etc.
You can assume that similar property types (e.g., two-bedroom homes) in the neighbourhood charge equal rent amounts, but it’s still best to use the complete assessment process below to figure out exactly what you should charge in relation to other rentals in your area.
How Do I Accurately Calculate for the Ideal Rent to Charge?
When estimating rent amounts, there are multiple factors to consider, including your location, property conditions, market rates, and tenant demographics. Let’s go through them one by one, so you know what to expect before putting your rental property on the market.
1. Consider the location of your property.
Generally, proximity to business districts, affluent neighbourhoods, or landmarks (e.g., shopping centres or the beach) are factors that allow you to charge higher rents. On the other hand, you can only charge so much if your property is near a low socio-economic area (e.g., near a jail or abandoned construction site).
Moreover, the location of your rental also influences the type of tenants you’ll attract. For example, beautiful homes near top-tier schools will attract families with young children. In contrast, a modern apartment in the business district area will attract young professionals chasing the job of their dreams.
Knowing the type of tenants you’ll get is important, because that’s how you can estimate their average monthly income—helping you set a suitable rent amount. After all, you won’t attract prospects if the rent is beyond their average budget, and you don’t want any of your future tenants to struggle with paying.
One formula to find the sweet spot for you and your tenants is by using the rent-to-income ratio. The rule is that monthly rent should not exceed a third of the tenants’ monthly income:
If you charge anything higher than this standard, you’ll either have a hard time getting applications, or you’ll have a hard time getting your tenants to pay on time and in full. You’ll want to stick to a rent amount that’s ideal for prospective tenants to give yourself the best chance of solid, predictable rental income.
2. Take into account the condition of your property.
Assess the strengths and weaknesses of your home. This evaluation includes simple factors, like how many bedrooms and bathrooms it has and any unique features (e.g., a fireplace or large patio), which might allow for higher rent. Moreover, these details influence the type of tenant you’ll have, such as a one-bedroom apartment will attract singles, while a four-bedroom mansion will attract a larger family.
You should also evaluate the not-so-obvious things that will affect your rental price. For example, compared to other similar properties, do you have better facilities and features? If so, you can charge more. If you have an apartment unit that has fewer features compared to others, however, you won’t be able to set a rent that’s higher than theirs.
Here’s a list of features that can affect your rent amount:
- Air conditioning
- Solar panels
- Swimming pool
- White goods (e.g., fridges and dishwashers)
- Off-street parking or garages
One more thing that can affect your rent amount is the age of your home. A modern, updated home can certainly charge a higher rent than a 40-year-old home with noticeable wear and tear. Generally, any homes older than 50 years old are considered “old,” and are susceptible to more maintenance costs.
3. Figure out what other similar properties are charging.
Now that you’ve assessed your property, it’s time to check out your competitors. You can search for them online through websites like Domain and RealEstate, or attend open houses in the area. Doing so helps you do the following:
- Estimate how much rent others are charging
- See how other landlords are furnishing their homes
- Notice how modern or outdated your property is in comparison
- Get an idea of the rental demand in the neighbourhood
As you scout, these are the three types of properties you want to look out for:
- Properties Better Than Yours: Look at which properties are better than yours to figure out what the upper limit of your rent should be. Their rent amount serves as a maximum or ceiling that you shouldn’t exceed, or you risk charging too much for your property and increasing vacancy times.
- Properties Worse Than Yours: Identify which properties aren’t as good as yours, so you’ll know what rent would be at the low end of the spectrum. Don’t charge any lower than theirs, or you’ll risk charging too little for your property.
- Properties Similar To Yours: The high-priced and low-priced properties now give you a good range of what you can’t and shouldn’t charge. Now, narrow down your price range by finding similar properties and determining what rent amount they charge.
These three types of properties give you an accurate estimate of the rent amount you can charge based on your competitors in the area.
4. Test it out and make the necessary adjustment.
Now, don’t simply “set and forget” your rental amount. Once you put your price out to the market, these are three strong indicators of whether you’re charging a fair amount or not:
- The popularity of your open house
- The number of enquiries you receive
- The number of subsequent applications
A rental property with a good price will generate a lot of interest, while one with a bad price won’t get much interest. If you still can’t find a suitable tenant after two open houses, consider these solutions:
- Adjust the rent amount accordingly and try again
- Offer perks like one free week of rent to entice tenants
If you get many calls, you might have either priced your property just right or too low. On the other hand, if you get barely any calls, your property might be too expensive or need better marketing tactics. So, either lower your rent amount or improve your listing with great photos and descriptions as soon as possible.
More importantly, you need to stay updated with the market conditions to see if you need to make any adjustments to maximise your returns. For example, if property prices in the neighbourhood increase by 10% in five years, you can also raise your rental amount accordingly to remain profitable and keep in line with inflation.
Find that Sweet Spot of Profitability and Market-Attractiveness
In reality, tenants don’t care about your expenses and how much you paid for the property. All they care about is how much better your offer is compared to others in the market.
If your property provides great value and you market it correctly, you’ll have a long line of tenants clamouring to rent your property. On the other hand, if your property is way too expensive, they won’t give you the time of day—even if you have a mathematical formula to justify your rent amount.
So, make sure to consider your property location, property conditions, and nearby competition when setting your rent amount, and test out your strategy to make necessary adjustments. With time and effort, you’ll land on a rent amount that maximises your rental yield while attracting price-conscious tenants.
If you’re still looking for more help, our expert property managers in Benchmark can help you set a rent amount that suits your investment strategy. We’ve also launched our professional tool [insert name] to get your ideal rent amount in a matter of minutes.