October 25, 2008

How to set rent rate for a rental

If you already own or you are considering purchasing a property to rent, you should determine the right amount to rent the property for.

To set rents you have to do some market research to find out what rentals go for in your market. You can use the following 3 sources to get you data on rental rates in your market:

HUD's Fair Market Rents - Go to the HUD FMR site and look up your city/metro area. These rent prices are rough average figures for given number of bedrooms in a unit. This is an overall average for an entire city so it won't differentiate between good and bad areas.

Research Craigslist & newspaper - Check the classified listings on Craigslist and for your local newspaper. Skim through the listings and record the rents for similar units.

Rentometer - Go to the Rentometer website and enter your information. It asks your rent rate, if you have a current rate then use that, or just use a guess figure. The site will indicate how your given rent falls in the range and show a meter of low to high values for rents in that area compared to other rentals.

Take each of these sources with a grain of salt. Your property is unique and you can't pull an average number out a pile of properties and assume that applies as well to your property.

Lets look at an example: In my city the FMR is about $800 for a 2 bedroom. I skimmed through Craigslist and it looks like you can get 2 bedroom rentals for $810, $775 and $848. I plug in my address and rent for a 2 bedroom in a duplex into Rentometer and it tells me that $800 is close to the median and it indicates the range of rents is $600 to $1100 for the 873 properties it checked within 3 miles. Given all this I think that renting a 2 bedroom for about $800 would be in the middle.

You do need to think about your specific property and how it would compare to other rentals. Look at all the features your property has and what other properties have. You need to look at what each property has and do a realistic apples to apples comparison. Rents will be higher if you have more features such as a new building, fenced yards, fireplaces, washer and dryers, etc and rents will be lower if the building is older, if the neighborhood isn't as nice, if its close to an airport or freeway, or if the property is lacking features most homes might have.

Once you've determined what rents are in your market you then need to make a personal choice about whether you want to rent higher or lower. There are pros and cons to each. If you choose to have lower rents then it will rent faster and retain tenants longer but your income will be lower. If your rents are higher then you'll make more money every month but it will be harder to fill vacancies and tenants might move out faster and more frequently.

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