What to make my rents

Question

Excited to say that I am in the process of closing on a house. Been looking for my first investment property for the last couple of months. Finally found a duplex I actually fits my parameters and seems like a good deal. My main question is concerning the rents.
While I love the house, one concern I see is that it only contains a single furnace and water heater for a duplex, so it was converted. However, previous seller let me know that prior to buying there were two tenants living in the house in which the utility bills were added directly to the rent.

I ran my numbers and I am earning about $208 monthly cash flow with CoC ROI of 7%, which I am ok with. My main question is what should my rents be if I possibly want to increase this cash flow. I assumed around $900 for larger unit.

House square footage(1800),

1 Tennat(living upstairs)(600 sf)(Rent:700)

Downstairs(No tennats)(1200 sf)

I assumed around $254 per month for utilities for the whole house(Akron, OH)

Nathan Gesner · Answer

You can't just pick numbers out of thin air and expect to be successful. We have no way of knowing what rents should be without seeing the property and studying your market.

Look at websites like apartments.com, zillow, realtor.com, zumper, etc. Find rentals comparable to yours based on size, # of beds/baths, condition, location, type of unit (apartment, house, townhome, condo), etc. See what others are charging for theirs and then price yours similar. You have to look closely to determine if they are including any utilities in their rent rate.

As a Landlord, I recommend you study the market at least every six months to stay on top of trends. It's real easy to get lazy and fall behind on rents, costing you tens of thousands in lost income over just a few short years.

Andrew Freed · Answer

@Stephan Guna - When pricing rental units, base it off rented comparable and not listed comparable. One of the biggest mistakes I see from new investors is overpricing their rental units and as a result, experiencing months of unneeded vacancy. When pricing out your rental units, base it off rented units in the area and not what units are listed at. Anyone can list a unit at any price they want, the question is, will it rent at that price?For comparable, I like the rental comp to be as close to the property as possible, preferably 0.5 miles but as far 1 mile. Additionally, the time frame should be less as well, preferably 3 months but as long as 6 months. And conditionally, bedroom wise and square footage wise, the units should be similar. By basing the price off rental comps and not listed comps, you are saving yourself from potentially over-pricing the unit, resulting in additional months of loss rent. One additional month of a vacancy is the cost of the yearly gain from overpricing your unit by a couple hundred bucks so it's imperative to price it right in the beginning!

Randall Alan · Answer

@Stephan Guna

I would start out by looking at what rents are in your area on Zillow and other available rentals similar to your unit -  square foot wise.  Pretend you are a renter and looking for a property in the same area as your new duplex. What is your competition? You need to be in the same ballpark for a comparable rental in order for your unit to rent, usually.

As for the utilities, you can usually call the utility provider and they can provide you with what your average utility bill is across the entire year or at least the last 3 to 6 months. Keep in mind it gets really cold in the winter and hot in the summer… So you can’t use a current bill to try to represent the entire year.

That’s a little wonky on having one furnace for both units as well as one water heater. Hopefully the tenants in each unit like the same temperature! If one likes it hot and the other would like that cold, you may have an issue. By including the utilities in your rent, there is no incentive to save on utilities. One tenant may leave for two weeks vacation and leave it set at 72° in the heat of summer, instead of turning it up to 80. It leaves you in a hot seat for whatever they do. Another good question is where is the thermostat? I would think the upstairs unit would get hotter quicker. I’m not so sure I wouldn’t build in some contingency where the utility rate operates separately from the rental rate on a lagging basis… this way there is sone incentive to conserve on utilities or at least be able to re-price that part of the rental as the year went by. And if not that, I would be sure to pad the utility bill to account for any increased usage that might come along before you can reset it at the next rental period. All of your profit could easily go away if a utility bill in the summer is $450… Which is what one of my 2100 square-foot rentals is in Florida during the heat of the summer… so definitely be careful on how are you price your utilities.

All the best!

Randy

What to make my rents

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