How to Set Rental Rates for Your Properties

Learn the five steps you need to take before you set your rental rates.
Photo Copyright : Cathy Yeulet / 123rf.com

Are you taking on renters for the first time? Or perhaps you’re wondering how to keep your rental property competitive in today’s market.

There are two sides to the amount you charge to rent a residential property. On one side, you want to be sure you’re covering your costs—and making a little profit, as well. Flip the coin, and you want to make the price competitive for your neighborhood, as well. Charging more ensures that this investment is worth the time and effort you’re putting into it. But a competitive price will attract renters who stay longer, lessening the costs of tenant turnover.

Finding this balance can be a challenge, especially in a real estate market as volatile as the one we’re seeing now. Below, we’re going to discuss the five steps you need to take before you set your rental rates. Then, we’ll tell you exactly how much you should charge to rent your properties.


Step 1: Find out Your Property’s Current Market Value

As you’ll see below, the amount you charge for rent is strongly linked to the value of the property. In order to set your rental rates, first you have to know the baseline. Sure, you could check your home’s Zillow value and be done with it. But we wouldn’t recommend it. Zillow Zestimates are regularly off by 4% or more, which could be tens of thousands of dollars, depending on your property. You could also hire a home appraiser, make an appointment several weeks out, wait for a finished report, and then be responsible for the costs of the service.

But shouldn’t there be an easier way? NAI Beverly-Hanks’ professional real estate agents can help determine your property’s current value. Simply reach out to your agent and ask for a market update. Especially if you bought the property through your NAI Beverly-Hanks agent, they should be able to get you an up-to-date estimate of your home’s value in no time and for no charge.


Step 2: What are Similar Homes Renting for in Your Area?

In order to set a competitive price for your property, you need to know what the competition is doing. Focus on homes in your neighborhood or in similarly priced neighborhoods in your town. You want to make sure you’re making a one-to-one comparison. Next, narrow your search to homes of the same general size (bedrooms and bathrooms) and age. Prospective tenants are usually willing to pay more for rentals in new construction buildings, and in single-family homes compared to multi-family buildings.

After you’ve narrowed your search this far, it’s time to look at specifics. Consider the amenities of the home, from its location in the neighborhood and lot size to the fixtures and appliances. Renters choose properties for different reasons. Top among them are parking, security, air conditioning, walkability, and (especially now) outdoor entertainment areas. Rents also vary based on square footage, layouts, and floor level, as well as views, updates, and amenities. It could be that your in-unit washer and dryer justifies a higher rent.


Step 3: Figure out Your Expenses

Now that you have an objective idea of what your rental may be worth, it’s time to look at your return. After all, you invested in rental properties for a reason. The rent you charge should be competitive, sure. But it should also help you cover all your property expenses, and ideally, make a reasonable return above that.

Even with perfect, long-term tenants in place, you’re going to have regular and unexpected expenses. Your rate should cover regular expenses, such as your mortgage for the property, property taxes, HOA fees, and insurance. Depending on the age of the home or size of the property, you will have to estimate projected maintenance costs, landscaping costs (or a discount if the renters are handling those), and unexpected repairs. Ideally, you will also want to give yourself a buffer in case your property is vacant for a while between tenants, with no income coming in.

At the end of the day, your goal is to have 0–6% of the rent in your pocket as profit each month. (Note: this rate varies based on the details of your investment, and some property owners don’t see a profit until they sell the property.)


Step 4: What Time of Year is It?

Hopefully, this step won’t take too much research to complete. 

Seasonality matters to renters. And if you need to rent your property on an “off month,” it could affect the rate you’re able to set. Keep in mind that rental demand is highest during the spring and summer and tends to plateau during cold months. After all, no one wants to move a sofa during a snowstorm. And renters with kids want to avoid moving during the school year. Renters who accept a lease in the summer are also more likely to move in quickly. This is in part due to weather, as well as because of the higher demand from renters in summer months.


Step 5: How Long will the Lease be?

Much of the time, renters are long-term tenants who need a place to live because they are not ready to own a home, or owning a home does not fit their lifestyle. Other times, people just need a place to stay for a few months between homes, between jobs, or as they get acclimated to a city. If you’re entertaining short leases—month-to-month, three-month, or six-month leases—you have flexibility to charge more for your property. Renters are willing to pay a higher rate for properties they will not be staying in as long.

Keep in mind, though, that shorter leases also lead to more frequent tenant turnover, which leads to more expenses for you. It’s wise to consider the added money you bring in from shorter leases as compensation for the expenses of turnover, and not just as extra profit.


How Much Should You Charge for Rent?

Alright, so now you’ve completed the five steps above. Let’s lock in how to set the rental rates for your properties.

The industry standard for rental rates says that landlords should charge between 0.8% and 1.1% of the property’s value. For example, a home valued at WNC’s median sales price of $325,000 should rent for $2,600–$3,575 per month. For smaller homes, apartments, or condos, rents closer to 1% are the norm. For more expensive homes, using a lower percentage to set lower rates will attract more prospective tenants.

“Well, if it was that easy to set the rent, why did I have to go through those five steps,” we hear you asking. As we saw in Step 2, there are a lot of factors that affect a property’s value. Even within neighborhoods, your property’s unique set of amenities could make it more or less desirable than the rental next door. 

Pro tip: It’s easy to increase the rent that you receive from tenants by increasing the value they believe they are receiving. To set yourself above the competition, consider including utilities in the cost of the rent. (But specify which ones and any caps you put in place.) Renters will also pay more if the property has new appliances or comes furnished.

Use the percentage range above to set the boundaries of what you could charge. Then, take your amenities, competition, and expenses into account to narrow that range. What you end up with is a reasonable market value for your rental.


Need More Help Learning How to Set Rental Rates for Your Properties?

As the real estate market changes and your property ages (or updates are made), the amount you charge in rent should change, too. Every time a lease expires, you should take the opportunity to reevaluate the value and condition of your property and the rent you charge. It may be advantageous to you to make small adjustments year to year in order to lessen tenant turnover. But at moments when your renters do move on or move up, setting fresh rates can mean making fresh profits.

If you want help determining how to set the rental rates for your properties, we’re here to help. Reach out to an NAI Beverly-Hanks commercial real estate agent today.

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