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Setting the rent for your investment property is one of the most crucial decisions property owners make. If you price your property too high, your home could sit empty, costing big dollars along the way. If you set your rental price too low, you’re leaving money on the table. So how do you calculate the right price for your property?
Start by Doing the Math
Successful investment owners make money off their rental properties. Simply put, this means that the monthly cost of owning a property is less than the monthly rent you’re bringing in. In the industry, this is called your cash flow. To start calculating this number, you need to add up your monthly operating expenses. These include:
- Property taxes, calculated monthly.
- Property insurance.
- Maintenance and upkeep.
- Permits, if necessary.
Smart investors also include in this number costs associated with vacancies and capital expenditures — like the occasional new roof or furnace. Setting this money aside each month gives property owners a cushion against the unexpected costs that inevitably come with owning a rental. Once you’ve calculated operating expenses, you also need to include your monthly financing costs if you don’t own your investment property outright. Here’s what that might look like using made-up numbers:
- Property taxes, calculated monthly: $200
- Property insurance: $85.
- Maintenance and upkeep: $60.
- Permits, if necessary: $10.
- Vacancy cost: $85
- Capital expenditure cost: $85
- Month financing cost: $600
Added together, your total monthly operating expenses would be $1,125. For your property to have a positive cash flow, you’ll need to charge more than $1,125 in rent. If you charge less than $1,125, your property will have a negative cash flow, meaning you’ll have to spend money out of your pocket to cover the property’s cost. Knowing this number will give you a place to start when setting your rental rate.
Do a Little Research
Once you’ve calculated your operating expenses, it’s time to do a little research. A common rule-of-thumb for calculating rent is 1% of your property value. So, if your home’s value is $250,000, your rent would be $2,500 per month. This simple formula doesn’t work in every scenario, however. In some cases, 1% could be far too little. In other cases, way too much.
Other factors like your home’s condition, its neighborhood, and local rental laws may play a significant role in your final price. Your homes features, like air conditioning, storage space, and pet policy, could also influence the rent you charge.
Another way to determine your rental rate is to research what other property owners are charging for similar homes. That may provide some insight into the ways rental prices fluctuate within the same city or town. Once you’ve established a list of comparable properties — known as “comps” — you can begin understanding what the rental market looks like in your area and if you’ll see a positive cash flow based on your operating expenses.
Or, You Can Hire a Pro
If all this sounds a bit overwhelming, that’s understandable. There are plenty of people who avoid joining the ranks of rental owners simply because they don’t want to deal with these kinds of hassles. Unfortunately, those people miss out on the financial benefits that come from owning property. Others take the plunge into the investment property market, manage their properties themselves, and figure these details out as they go. While this works for some people, many investment property owners learn hard and expensive lessons along the way and leave the market out of frustration.
The most successful investment property owners work with professional third-party property managers — like Rent Portland Homes by Darla Andrew. These companies are real estate experts who know how to set your rent so that it attracts as many possible tenants as possible while still maximizing the return on your investment. Qualified property managers also handle important details like tenant screenings, lease agreements, rent collection, repairs, and documentation, so property owners don’t have to.
If you’d like a professional’s opinion on the rental value of your property, we’d love to talk. You can call Rent Portland Homes by Darla Andrew at (503) 515-3170 or by filling the contact form on our website.