How much rent do I charge?

Question

As I obtain information and start to compute the numbers for a prospective property, what is the best method to figure out how much rent I will be able to charge tenants?  I need to have this information for my numbers but not sure how to figure it out or even guess.  Thanks

Andrew Martel · Answer

So what I do when I look at a property is this-

Find the property I am interested in-  If this is a "normal" rental (not low income/section 8) I try to find a home with some built in equity (who doesn't?!)

I then look at the area and see if there are similar homes for rent in that neighborhood. I use zillow/call rental signs/ craigslist or call my realtor.

I then calculate the mortgage, taxes, and insurance costs

Factor in repair costs.

Ananlyze the data and determine the rental amount based off comparables.  A lot of factors come into how much you should rent  your house out for.  The question I always ask myself (with anything I pay money for) what is the benefit I get for spending that extra dollar? For a person who wants to rent your house, this may be a question they ask themselves, so why would they rent your home over the others in the area? What is your advantage and what are you willing to accept for that advantage?

So an example would be something like this:

House size - 2400 sqft 4bd/2ba

Cost - $160,000 (Assuming Closing costs rolled into loan)

Taxes- $3200/yr

Insurance - $800/yr

20%down @ 30 years w/4.5% interest rate - PITI = ~ $1144.00

Comparables are between 1300-1500 for home with similar size and location

I would look at this and say sweet I could net $356 a month if I'm at the high end of the rental market! But am I? At that point you have to factor in your advantages. Is the home in a "better location" than the other homes, does it have upgrades in it that would make it more appealing or warrant higher paying renters? What kind of market are you appealing to is really what you're looking to answer.  At that point, you can make your decision and based on what you decide can determine if it is something you want to get into.  Is making 200$ a month cash flow worth it? Maybe.. maybe not.  Does it come close to the 2% rule? It's tough to come to a conclusion and you need to be wary of analysis paralysis.  Inaction can kill ya.

I would suggest reading up on some more information on this site and maybe some books to see what other options you may have.  There's a ton of great info out there!  That being said I'll leave this link right here for you to check out if you'd like.

http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

I wish you the best of luck and if you have more questions... ask them!!

-Drew

Mike H. · Answer

Why is that you are unable to find any rental comps? How big a town are you operating in?

I'm actually in some smaller towns (5 to 15k in population depending on the town) and I always have comps on rentals.   Keep in mind, that comps don't have to be houses that were rented. They just have to be listings.

Ultimately, that is your competition. But you should be able to come up with a pretty good sense of what the rents are for your area and house type from existing listings. If not, try rentometer. If you sign up for the free account and enter a house w/some characteristics (i.e bdrm, square footage), they will give you an estimate. DON"T use their estimate.

But DO use the historical rentals that they list with their estimate. That might help you if you don't have any active rental listings in your area.

Keep in mind, coming up with rent estimates is typically pretty easy. Bedrooms, bathrooms, square footage, and condition.

I use zillow but set the filter to show rentals only so you can see the active listings. I also use realtor.com (again search for the rentals and not for sale) and then craigslist.

James Wise · Answer

check craigslist and zillow for similar homes for rent.

call for rent signs as your driving through neighborhoods.

check local newspaper ads.

Roberto Andrade · Answer

@Calvin Lang  check www.rentometer.com as well. Good Luck!

Calvin Lang · Answer

Thanks to all!! I guess I am asking for too much.  It sounds like I have the information already and I am doing the right things, just wanting to get "all the answers".  Okay, Okay, I will stop looking for the perfect answer and go with the estimates I have found.  Thanks Drew and Larry and everyone else for your help.

Calvin

Larry Turowski · Answer

@Calvin Lang A $125 spread is not unrealistic.  There is a lower price at which you can be pretty certain of renting the place out within a reasonable timeframe, and there is a higher price that you might rent it out for if you get lucky or wait long enough.

Go with the lower range for your calculations.  And do as @James Wise said.  Never take someone else's word for it.

Calvin Lang · Answer

Thanks...I guess I am looking for too much...When I ask I normally get a spread for an answer and the spread is in the 100.00 - 125.00 range.  To me that is a lot and when making a decision whether to buy or not a difference of 100 in cash flow is important to me.  I am new at this so I don't have the experience or knowledge as to make a solid estimate.

Jason C. · Answer

Are  you working with a realtor on this deal? If so, they should share the mls rental comparables when asked.

Calvin Lang · Answer

Thanks..I have done those great ideas to limited success.  I have heard many bad comments about the reliability of zillow and often times i am unable to find anything that has a good comparison on craigslist or the paper.   Looking for other reliable ideas..Thanks for the input

How much rent do I charge?

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