How Much Rent To Charge for Your Property
If it’s your first rental property, usually there’s a lot of confusion, unless you have tenants already, about how much you should actually be charging. Even if you do have tenants, you might want to go through this exercise to make sure you are not undercharging.
One of the things that you need to do is you need to do some research to determine where the market really is. We usually start our research at Craigslist. Nowadays, most properties are advertised at Craigslist and you want to look at same class of properties that you have. If you have 4-unit apartment buildings, you would like to look at 4-units apartment buildings. If it’s a 2-bedroom, one bath, you want to look at the same for a direct comparison. If you are renting a single family home, you want to look at single family homes. Each of those will have a different price point depending upon the features and where it is located.
Craigslist is a good start. Some of the other places that you want to look include Rental magazines. Rental magazine are a dying industry. Most of the people are going online. However, you can still find them typically in the grocery stores. You also want to check local newspapers and shopper stoppers. Now, just like rental magazines, newspapers are also an expensive medium and it’s not used very often.
Something that you have to do is you have to do some site visits. You have to see how you compare with your competition. Where are they priced versus what you are thinking? Are they higher than you or are they lower than you? Compare the amenities. Typically, when we do a site visit, we just disclose that we are just researching the market. But we try not to make it inconvenient for the people. We try to go in at a time when they are showing it to other people.
The other place you can look is you can go on the HUD (Housing Urban Development) site. They will have a fair market value rent for the area. The HUD rent can run a little higher or lower depending upon the market value that you are in. But HUD gives you pretty good feel. If you are renting to section 8 tenants, which is a government voucher program, in many cases the voucher will follow the HUD guideline.
Some other things to consider when you are renting are that you want to take good care of good tenants. Once you have somebody good in there you want to keep them. At the end of year you will renew the lease. One of the things that I do is I decide how much trouble this tenant has been. Have they paid their rent on time? Have they called for a lot of maintenance items? Are they taking care of small things themselves? Good tenants are taking care of things, they aren’t bothering you, and they are taking good care of the property. When you drive by everything looks good.
What you want to do is you want to minimize your rent increases because good tenants are like gold. They will pay month in, month out. We have got people who have stayed on a property for 15 to 17 years and sometimes even longer.
What I also do is I look at if the tenant has paid on time, but they are a little more difficult and challenging. We have to provide a lot of maintenance and hand holding. In that also, we can minimize the rent but we will charge them more than the person who basically needs very little.
I have calculated this in three different levels:
- Low hassle tenants
- Medium hassle tenants
- High hassle tenants
With low hassle tenants, you don’t have to raise the rent that much. You have got to cover your cost increase and additional expenses. However I don’t recommend much more. If the rental market is going up rapidly and if there is room for raise, we are not foolish, we are also going to raise.
You have got your medium hassle tenants; you are going to raise the rent a little more than on the low maintenance tenants. They are a bit more trouble so you want to be paid for the extra work you have to put in on the management side.
Then there are problem tenants who aren’t paying rent on time, or calling a lot for maintenance, so we really don’t care whether they stay or go. If they are staying, we want to be compensated for the additional trouble that they will provide, so we give them a pretty good rent increase. In that way, if they do stay, we are well paid for our additional difficulties. If they go we can find a more easy-going tenant.
If you want to position your property for sale as an investor, you want to make sure that you maximize the rent. The property is going to be sold generally based upon how much rent its bringing in versus the expenses. If you have good tenants, you haven’t raised rent much over the years. That’s going to undermine you when it comes time to sell it. If you are going to sell, make sure that the rents are raised up long before you go ahead and list. That is so potential buyers can see the cash flow coming in. I like to typically see at least one year of higher rents when I buy. Therefore when I sell, I’ll typically raise it a year in advance. In that way, we have one year of solid records showing the additional income, which they can use at the bank for the loan. Keep in mind:
- Do your research
- Take good care of your tenants
- Charge your good tenants minimum increases
- Charge your poor tenants large increases
- Maximize the profit potential
You also need to keep in mind that even with your good tenants; you do need raise your rent enough to cover your cost. If the market rent has gone up 20%, you would be foolish not to raise 15% or so. You will still be below market rate a bit which means it is unlikely they will go elsewhere.