Lots of digital ink has been spilled here on the pages of BiggerPockets about how to value a property and set a strike price. (Here, for example, is my take on the matter.) Much less has been directed at how to set the rent price. Yet this is a critical task for real estate investors and property managers to master.
Remember, properties with a mortgage rarely have a large amount of cash flow. Oftentimes, it will be something close to $100/month. If you set your rent $100 too low, then your cash flow goes to zero. If you set it $100 to high, it might sit vacant for an extra month. In which case, if the property rents for $1,200/month, again, your cash flow for the year goes to zero.
So, how should a new landlord or property manager go about setting rents? Well, I’m glad you asked.
First Comp the Neighborhood
Unsurprisingly, the best way to find out what the market rent of a property is, is the same method used to determine its value: compare it to similar properties nearby.
You can do this by simply driving the neighborhood, finding “For Rent” signs, and calling on them. You should ask for the rent price, deposit, terms (i.e., month-t0-month), bedrooms, bathrooms, and approximate square footage.
That being said, in the age of the internet, using the web to comp nearby rentals is generally a better solution.
The one big problem you will face is that unlike with sales, there is no website to go to find actually rented comps. You can only find properties that are actively being listed for rent on the market right now. For this reason, it’s not a bad idea to talk to the neighbors and even ask them what they pay for rent (although you should preface this by saying it’s OK if they would not like to answer).
Just remember, some of them may be paying substantially below market. Certain landlords, particularly of the mom-and-pop variety, rarely raise rents. Thereby, if they have a long-term resident, it’s not uncommon for that person to be paying substantially less than the market rate of rent.
Therefore, it’s important not to rely on only one or two comparables or to rely solely on what people nearby say. With technology these days, you should definitely comp the property online, as well.
The first place to check if you are simply trying to get a ballpark figure for how much a unit will rent for is Rentometer.com. This is most useful when evaluating properties before you purchase though, as the rentals this site compares your property to are not particularly reliable. To pull a report, you must put in what you think the rent will be given the location and number of bedrooms. Then it shows you what other people have inputted and compares your rent to “their” rent. Notably, you are not comparing your property to actual comps but only to other people’s estimates.
This is the free version and there is a paid service that is more in-depth. But for the free version at least, it’s no more than a place to start.
Of course, there are other shorthand methods to estimate rent. Smart Asset, for example, notes that “Typically, the rents that landlords charge fall between 0.8% and 1.1% of the home’s value.” So if you know the value of the property, you will have an approximate range for what such properties usually rent for.
But why settle for approximate? To get a better idea, let’s look at actual comps currently listed for rent. For that, I would recommend going to Craigslist and using their map feature, as well as at least one of these websites:
The reason to look at Craigslist and at least one of the other websites mentioned is that sites like Rentlinx (which syndicate ads to a large number of sites) do not syndicate to Craigslist. So the listings on Trulia will usually be on Zillow, too, but not necessarily on Craigslist.
That being said, if you are having trouble finding comps, the first thing to do is to look at more websites. The next thing to do is expand your search (either geographically or by looking at properties that are less similar to your subject).
On Craigslist, check out the map feature and look at rental listings located as close to your property as possible. The map feature looks like this:
Then, click on the properties nearby to learn more about them. Select the ones that are most similar to the property you are setting the price to. You should be looking for:
- Rent Price
- Other Conditions (are pets allowed, month-to-month or year term, etc.)
- Square Footage
- General Condition (look through the pictures)
- Other Amenities (fenced yard, lot size, pool, etc.)
Try to stay as close as you can to your subject property (within a mile if at all possible).
You can also use paid services such as Rent Range. The price is pretty reasonable, and they run a detailed report of the rental comps nearby to determine a low-, middle-, and high-range rental price for your unit.
An Example Analysis
Here, for example, is a 3-bed, 1.5-bath, 1,000-square-foot house in Grandview we recently rented:
And here’s an analysis for it with nearby comps.
We set the rent at $945, and it rented quickly in about two weeks. Next time, we will probably be just a bit more aggressive.
Now, as you gain experience and get better at this, you do not necessarily need to use a spreadsheet and can just sort of “eyeball it.” Admittedly, this is what we usually do now. But it’s certainly helpful to start out with a pen and pad or an Excel sheet.
Make sure to pay close attention to the pictures and general condition. It’s not a bad idea to drive by a few of these comps, too. We generally fix up our houses to a point where they are nicer than most of the other houses in the neighborhood. We also generally rent our houses for a bit more. If your property is in better condition than most of the others, it’s worth it to push a little harder on the rents.
And make sure you note how nice the area is for each comp. In some places, the area can get substantially worse even just a short distance away. You will need to learn these things about the areas you are investing in and be able to adjust certain comps and in some cases, ignore others. Here is an article on evaluating areas, and here is one on GIS software, which is fairly expensive but extremely powerful when it comes to performing such demographic analyses.
Furthermore, you should keep track of what happened when you leased the property the last time. That information can help the next time it comes available. If the property rented right away a year ago, it’s probably a good idea to increase the rent price a decent amount this time around.
Notes on Apartments and Commercial
If you are trying to set the rent for the units in an apartment building, doing a market survey is a good idea. With such a survey, you go to the individual property websites, as well as sites like Zillow, and even call them for information if necessary. Here is a good article on how to perform such a survey.
You can even “shop” a few of your competitors—i.e., go in as a tenant to view a unit or two—if you think that would help.
For commercial properties (i.e., office, retail, etc.), there are rental comps (including those that actually have been leased out) on CoStar. Unfortunately, CoStar is fairly expensive. But if you intend to get into commercial real estate, it’s something you really should look into.
What to Do If It Doesn’t Rent
If the property doesn’t rent, that usually means the rent is too high. But before settling on that explanation, you first want to check a few things to make sure it’s not an aberration.
Make sure everything about your listing is normal. For starters, make sure you have marketing pictures up and they all look good. Make sure the property didn’t get broken into or there wasn’t a sewer leak and the whole place smells like raw sewage. Or perhaps the rehab wasn’t finished in the first place or it was just never cleaned.
Also, sometimes in the dead of winter, people simply aren’t looking to move and you need to be more patient. This is especially true if it’s around Christmas and New Year’s or if it’s negative 10 degrees Fahrenheit outside and there’s an ice storm.
If there’s nothing odd going on with the listing or time of year, it means the rent is too high and you need to come down. How far to go is a bit of an art. If you are getting lots of showings, but no bites, you should probably wait a bit longer and then only reduce the price a little, perhaps 5 percent. If you are getting absolutely no interest, then a 10 percent drop might be called for.
As a very broad rule of thumb, you should drop the rent approximately 5% every two to three weeks unless you are getting lots of applications that are simply being declined. In such cases, it’s probably best to hold firm at the price you are at for a few more weeks. You want to have a basic formula for lowering rents, but there are so many variables that you can’t just blindly follow one.
What to Do If You Inherit a Tenant
Generally, inherited tenants tend to be paying below-market rent. You can decide to just let them stay until they leave (at below-market rent, this will likely be a long time) or ease the rent up slowly. Or you can just rip the Band-Aid off and increase the rent to market or close to it. (They will likely either move out or ask you to improve the property, which you should do if they are a good tenant.)
Such properties with inherited tenants tend to also need a decent amount of rehab work. Therefore, we tend to raise the rent substantially but not all the way up to market, as it’s difficult to do upgrades while the tenant is still living there. Eventually, we get back to market rates, but it takes quite a bit of time. Ripping the bandage off, so to speak, may be more painful at first, but it gets you to market rents much quicker.
On the other hand, if you have several rentals and multiple vacancies, it may be worth just keeping them on a month-to-month basis until you have gotten your occupancy back up and can afford another vacancy.
If you follow these steps, you will usually get the rent price right. But sometimes you might get it wrong and set the rent too low and the property rents below market or set the rent too high and have to endure an extended vacancy. Business can be messy, and you are not going to get it perfect. A few mistakes here and there won’t hurt you too badly.
The key thing is to create and follow a system so you are right most of the time, and of course, continue to improve at setting the correct rent price.
What other methods/tools are helpful in determining how much to charge for rent?
Join the discussion below.