How to Calculate Fair Rental Property Pricing

If you own a rental property, it can be difficult to decide how much to charge for rent. Rental markets are constantly changing, with average rent prices fluctuating by the month. According to recent data, 36.6 percent of U.S. households are currently renting. Meanwhile, rent prices are on the rise, with the median U.S. rent increasing 2.8 percent in the last year alone. Of course, this surge in demand is good news for landlords. Still, it’s important to determine the proper monthly rent for your property to attract good tenants.

Understand the Market

Before calculating your property’s rent, it is important to understand the local real estate market. Use sites like Zillow and Trulia to research average property values and rents in your area. This will give you a good idea of the rent range for your unit. Some of these sites even have rent estimators and local rental reports that show average rental ranges based on location and number of bedrooms.

You should also look into your area’s average rent prices over the months and years. This is because rent prices fluctuate from month to month, depending on demand. For example, a lease that starts during the summer months will usually fetch a higher monthly rent than one that is initiated in winter. This is because there is far more demand for rentals in the summer when kids are out of school. The higher the demand, the more you can charge for your property and the more quality tenant options you will have.

Research Comparable Units

Along with market research, it’s a good idea to choose a few comparable rental units to look at for comparison. Try to find units that are similar to yours in square footage, bedrooms, location and amenities. For example, say you have a conveniently located 1,200 square-foot townhouse with two bedrooms and 1½ baths. You find a similarly located 1,150 square-foot condo that has two bedrooms and two full baths. Your rental should likely be set relatively close in price to this comparable unit unless there is some glaring disparity between the two, such as one unit being in significantly worse shape than the other.

Note that researching comparable units is only meant to give you an idea of what others are charging for similar properties. The catch with comparing one unit to another is that each home has unique features. If your rental has interesting architectural details or exceptional amenities, you can consider charging more for rent. However, you have to keep the market in mind, as most tenants will only choose a home if they believe it is a good value. You might think your one-of-a-kind bathroom tiling brings added value, but that doesn't mean a prospective renter will be inclined to pay more for it.

The 1 Percent Rule

If you're looking for a simple rule you can consult to calculate your property's rent, look no further than the 1 percent rule. Essentially, this rule states that you should charge at least 1 percent of your property’s overall cost for rent. So, if you bought your property for $150,000, you would charge $1,500 per month for rent. The 1 percent rule ensures that you are able to cover immediate costs and put away money for long-term expenses while also turning a moderate profit.

Of course, you should always consider the 1 percent rule in light of the other market research you’ve completed. For example, say the 1 percent rule shows that you should charge $1,800 per month in rent. However, during your research, you see that comparable units are renting in the $3,000 range. In this case, you should consider charging more than 1 percent. The 1 percent rule is a helpful guideline, not necessarily a hard and fast rule. Always keep in mind the local market, demand and the specifics of your unique property when calculating rent.

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