When you manage or own a rental property, your success depends on renting the property at a rate that consistently earns you a profit. However, how do you know what rate to charge for providing cash flow to cover expenses that won't outpace the rental market?
Knowing how to calculate your rental rate is not about picking a number others are charging and charging a similar rate. Two main factors determine rental rates: the physical characteristics of the property and its location.
To understand how these factors affect your rental rate, consider these 13 questions to help determine your property's rental rate.
13 questions to help you calculate your rental rate
1) How does my property's condition affect what rent I can charge?
A distressed house or even one needing a few obvious external repairs may be an attractive investment. You can typically buy a distressed house at a reasonable price and add value by making updates and repairs. In its newly renovated condition, the property will rent for more than it would have without repairs.
Suppose the property is already in good condition, with no major repairs required. In that case, your path to higher rent will rely on interior improvements or the addition of amenities, like a garage or off-street parking, or possible upgrades to any community areas.
2) How does my property's value affect my rental rate?
The rental rate for a property typically ranges between .8%–1.1% of the home’s current market value. For a property valued at $200,000, the rent could range between $1,600–$2,200 a month.
When you use this method to calculate a rental rate for your property, take the price range of the property into account. If the property’s value is $100,000 or less, the 1% rule is a reliable benchmark to calculate the rental rate.
However, if your property’s value is $275,000 or more, you may want to consider a rate under the .8%-1.1% threshold to attract solid tenants, which is also a priority. Your best case is to set a rental rate that’s likely to be affordable for the people you want to attract to your property.
3) How does the number of bedrooms and bathrooms affect the rate I can charge?
An area’s base rents typically increase by $200 or more for every additional bedroom or bathroom. Each location is different, but it's safe to assume you can charge a higher rental rate if you have more bedrooms and bathrooms.
For example, a single-family rental property with two bedrooms and one bathroom will typically rent for about $300 less than a house with two bedrooms and two bathrooms.
4) How recent are the updates to your rental property?
Updating your rental property if you want to earn top-dollar rent is essential – the green shag carpeting must go. Make durable, neutral improvements that will look good now and hold up well to the scrutiny of future tenants; it’s essential, however, to avoid any temptation to over-improve the property.
Not every home warrants upgrading to hardwood floors, stainless appliances, and granite countertops. A good refresh can position you to charge more rent; a complete renovation usually isn’t necessary. In many cases, laminate flooring, a new countertop, mid-grade appliances, and a new coat of paint will work wonders to improve your property.
5) Does my property include amenities?
Renters value typical amenities ranging from a storage shed or garage to a dishwasher, garbage disposal, or onsite laundry. Adding amenities might allow you to charge between 3%–15% more in rent, depending on comparable rental rates.
6) Are there local rent control laws that apply to my property?
Every state and county has landlord/tenant laws that regulate the business of renting out property. One such law is rent control, which may or may not be in a place where your property is located. Rent control laws can restrict how much rents can increase; before you set your rent, understand how these regulations will affect what you can charge for your property now and in the future.
7) How does my property’s neighborhood affect rent?
A property in a high-end neighborhood, or one with a great view, will rent at a higher rate than one located next to a warehouse in a mixed-use neighborhood. You can almost always charge more if your property is on or near a lake or pond than for one that looks out over a parking lot. Privacy is also an amenity that renters value, so a secluded yard or even a row of trees that protects an attractive outdoor space will boost the rate you can charge.
8) How do local rental rates affect what I should charge?
When comparing rental rates, many landlords look at rental rates for the property next door, down the block, or in the neighborhood and use that information to price their property similarly. The property location always matters, but you must also consider the property's condition, amenities, and size before lining up your rent amount with other properties' charges. You'll want to consider the following:
- Age of the home
- Lot size
- Most recent remodel or renovation
You may find some of the properties in your area are comparable to yours and therefore provide a good reference point from which to set your rent, but it's wise to do your due diligence when calculating your rental rate.
9) What’s the historical demand for my property?
When calculating your rental rate, look at past trends in demand for rentals in your area. You can use online tools to help you take a look at past rental trends in your area. RentSpree has a rental rate evaluation tool that allows you to explore a property address and see how rent has changed over time.
The correct rental rate is likely to be close to the local trend if your rental property has no significant updates or new amenities.
10) How safe is the neighborhood?
It may be challenging to attract tenants if your area has a high crime rate or is close to a busy intersection. Such factors affect how attractive your property will be to potential tenants, and you may not be able to charge a rate at the high end of your calculations. If your rental is in a less desirable area, the rental rate may fall below the average for the property size and type.
11) Is my property close to everyday public services?
The neighborhood’s walkability is one factor that will determine how attractive it is to potential tenants. If your property is within walking distance of shopping, hospitals, schools, and public transportation, you may be able to charge more in rent. If your tenants can meet their daily needs by walking or using public transit, they could well value your property over a similar one further away with fewer services nearby.
12) Do the seasons affect rent in my area?
Depending on your location, it may be more common for people to wait until summer to move and try to stay put during the winter. Your area may have other seasonal patterns, especially if you are in or near a resort location. Keep this in mind when calculating rent if you need to fill any vacancies during the slower months. While the pattern is not set in stone, it can give you a good idea of when to raise or lower your rent.
13) How should operating costs affect rent?
When calculating rent, consider all of the property's operating costs:
- Mortgage payments (if applicable)
- Maintenance costs
- Lost rental income during vacancy periods
- HOA fees
- Property management costs
Ensure your annual rent covers operating costs and includes your desired profit margin.
How to calculate my rental rate correctly?
When calculating rental rates, start with your research. A real estate business lives or dies by due diligence. Calculating rental rates is not just about numbers; you'll also need to consider the home's location, value, amenities, condition, and safety for your tenants. Use the questions above to ensure you’ve done all necessary due diligence, and you’ll be able to set your rental rates confidently. Answer these questions and use a tool like RentSpree's rent estimator to help you calculate a rate that will minimize vacancies and maximize profits.