As a landlord, your main priority is to keep your occupancy rate as high as possible by finding, screening, and retaining tenants. The amount of rent you charge per unit or room plays a vital role in the type of residents you attract and if you will be profitable each month.
When determining what rent to charge month over month (MoM) or year over year (YoY), consider factors such as location, seasonal trends, market demands, and how your amenities compare to neighboring properties.
The guide below will give key insight into which factors matter most when determining how much to charge for rent.
1. Brush Up on Your Rental Control Laws
Rental control laws vary by state and city. As a landlord or property manager, you need to be thoroughly aware of which laws, if any, influence your rental prices. Before taking further steps, check to see if your property is subject to any rental or vacancy control laws. For more general state information, review this resource from the National Multifamily Housing Council.
2. Utilize the 1% Rule
A good rule of thumb when determining what your property is worth, especially if you own a house and plan to rent out rooms, is to use the 1% rule. As a starting point, your property’s monthly rent should be between 0.8% and 1.1% of the property’s total market value.
For instance, if your current property’s value stands at $500,000, then charge between $4,000 and $5,500 per month for rent.
So, how should you decide to charge 0.8% or 1.1%?
The main determining factor between charging 0.8% or 1.1% is if your property’s value is under or over $375,000. If it’s under, then consider charging closer to the minimum at 0.8%.
If the property’s value lies over $375,000, then consider charging closer to 1.1%. This 1% rule is more of a guideline. Make sure you don’t overcharge or ask too high of a price, or you might discourage responsible tenants who can readily present proof of income.
3. Understand the Rental Market Demand
A property’s rental market demand also has a large bearing on rental prices. Rental market demand is simply how competitive your complex or house is given certain factors. These factors include, but are not limited to, how you differentiate from competitors, the season, and both the national and local economy.
More detail on these factors below.
It is key to research the properties around your area and neighborhood. Conducting this type of research will help determine your rental rates. Normally, your competitor’s rental prices are posted on their websites. If not, you can always call and pretend to be a prospective lessee inquiring about different unit prices.
It’s also recommended that you take either in-person or virtual tours of your competitor’s properties. You want to know which amenities they include that your property does not and vice versa.
The breakdown below should serve as a framework as you compare each properties’ amenities.
- If a competitor offers more in-unit and shared amenities than you, consider charging less per unit than they do.
- If you have more in-unit and group amenities to offer, feel comfortable charging a higher rental rate than your competitors.
- If there’s an equal amount of amenities or one has better in-unit than shared amenities, contemplate charging an equivalent amount to your competitors.
When researching or visiting your competitors’ properties, use the guideline below.
Competition for renters changes dramatically nationwide based on the season. These seasonal changes can and should be predicted. According to Apartment List, apartment searches are beginning to increase each year starting in December and January. Searches peak in July.
The actual moving season steadily increases from February through June with dramatic spikes in July and August.
These rental application trends transpire due to the weather and people’s living habits. Most people would rather move in the summer when it’s warmer than during the rainy or winter season, which also coincides with the holidays.
Furthermore, families and college students make a large portion of renters, both of which often move during the summer break. Since many renters sign 12-month leases they get into a perpetual cycle of resigning leases or moving in June, July, and August.
How do these seasonal changes affect landlords?
Due to the seasonal supply and demand variances, you should be able to charge higher rental rates from April through June with your highest asking rates being in July and August. In the fall, and particularly around the holidays (Thanksgiving to New Year’s), supply will be quite low, so you should charge less.
A plethora of factors affect the real estate and rental market trends. The national and local economies both play substantial roles in determining how much to charge for rent.
For instance, during a recession, like the 2008 Great Recession or during the first half of the COVID-19 pandemic, many metropolitan areas, cities, and towns faced substantial economic downturns. During similar times, you should reduce your rental rates to keep up with a likely drop in demand.
Additionally, residents expect and are willing to pay less during recessions. During economic prosperity, you should increase rent prices. Keep in mind though, that they should be similar to your competitors and the market demand.
The local economy however has more bearing on renters than the national economy. During recessions, some cities’ rental markets remain hardly affected. Therefore, research your local market more heavily to better understand and predict what rental rates you should set month over month (MoM) or even week over week.
4. Account for Additional Expenses
At the most basic level, you need to cover your overhead expenses as a landlord. Meaning, your tenants’ rent should extend past your minimum costs to keep the property both operable and sustainable.
The best way to know your overhead costs is to diligently track your expenses, vacancies, and evictions MoM and YoY. Furthermore, take into account your area’s climate and possible maintenance costs. For example, if your region experiences long and cold winters, consider the cost of burst pipes. While on the opposite end, evaluate how extremely hot summers can lead to HVAC systems needing repairs. Also, take into account residents' causing normal wear and tear or possibly property damage.
See the list of expenses you should take into account:
- HOAs (if applicable)
- General property maintenance
- Unit-specific maintenance
- Landscaping and garden preservation
- Laundry room maintenance
- Cost of vacancy
- Employee payroll
5. Calculate Rent Based on The Scenario
When calculating rent, always consider the price per square foot. Price per square foot is a key real estate statistic both you and tenants will be looking at. Rent prices should shift from unit to unit based on square footage.
You have several options:
- You can determine the rental prices entirely on a per-square-footage basis formula. Meaning, you have a set dollar amount per square footage. Therefore, with each increase or decrease in livable square-footage space, there is a direct correlation to an amount. For example, a $2.00 per square foot means a unit that is 600 square feet costs $1,200 per month while an 800 square foot unit costs $1,600 per month.
- You can have rental rates set based on the type of unit. These different units being studios, 1BR 1BA, 2 BR 1BA, 2BR 2BA, etc.
- You can determine rent rates depending on a mix of price per square foot and the type of unit. This method works well for complexes that have multiple styles of units. For example, if you have two 1BR BA units but one has 200 more square feet and a nicer view. You would then charge based on square footage and view.
Regardless of which option you choose to go with, make sure you also account for the differences in-unit amenities and changes in market demand.
6. Highlight Your Top Property Amenities
As you look into neighboring properties, focus heavily on the amenities your property either offers or does not offer in contrast to these competitors. Consider the below amenities that many tenants find valuable.
Some prospective tenants care deeply about their vehicles. If you have covered or garage parking for all tenants consider including this cost in the rent total instead of an additional charge. If there’s limited availability for covered parking or designated spots then charge an extra fee for either.
When diagnosing your property’s neighborhood take into account your proximity to public transportation hubs and popular areas.
For instance, if you are within walking distance to a public transportation station highlight that as a key factor. Also try to bring attention to other popular attractions such as certain restaurants, neighborhood parks, or hiking trails.
The same need to highlight distance can be said for driving to specific locations or areas. Again, underscore your proximity in either distance or time to specific areas such as shopping centers, business centers, or other popular neighborhoods.
For many residents, especially women, having a sense of security is vital. If your property offers advanced technological features such as key fobs or lock combinations overtly state those.
Make it apparent to viewing residents if your property has security cameras, outsources a third-party security company, or has a gated vehicle and residential access. Lastly, If you offer renters insurance, let potential residents know in advance what it includes.
Indoor and Outdoor Amenities
For many occupants, amenities can be the difference between choosing your property and competitors. Consider the amenities below calculating your rent. And again, always compare both the number and quality of your amenities to neighboring competitors.
Use these points to determine the amount of rent to charge renters. Again, remember to consider factors such as neighboring properties, your amenities, and the rental market demand. Don’t be afraid to justify increases or decreases in rent based on these factors.