How Much Rent Should I Charge? 10 Steps To Charging The Right Price
Working out how much rent you should charge is an important part of being an investor. Charge too little and you are leaving money on the table, charge too much and you risk having your property lie vacant, making you no money at all.
So how do you find that sweet spot where you can rent your investment property for a great price?
1. Understand It Is 100% Market Driven
There are websites out there that will tell you to analyse your expenses to work out how much rent to charge. This is a complete waste of time.
Potential tenants don’t care what your expenses are or how much your property cost. All they care about is how your home compares to other homes in a similar area in a similar price range.
Tenants are looking to get the most bang for their buck when it comes to rental properties. If your property provides good value (and you market it correctly) then you will have tenants lining up out the door to inspect your property. If your property is too expensive no one will be interested…even if you have a scientific formula to explain why you are charging what you are charging.
2. Check Statistics…Then Ignore Them
There are many tools out there that can show you the median rental yield statistics of an area. This will only work for you if your property lies exactly within that median…which almost no properties ever do. But regardless it is a good starting place if you know the current value of your property. (If you don’t then I show you how to get FREE RPData Valuation Reports inside my members area)
Use this suburb analysis tool and type in your suburb. Find your property type (house or unit) and then look for “Gross Rental Yield” in the table.
For example – Currently the Suburb “Cronulla – 2230” shows a median gross rental yield for units of 3.97%.
Multiply this figure by the value of your property to find out the ‘median estimated rent’ for your property
So a $500,000 unit would rent for $380/week ($500,000 x 0.0397 / 52)
I would NEVER go off this figure alone. However, it gives us a good benchmark. We will unlikely be able to rent our $500,000 unit in Cronulla for $1,000/week, it’s more likely going to be around the $380-$500/week mark.
3. Check Vacancy Rates In The Area
4. Check Similar Properties In The Area
The best way to estimate the rental yield of your property is to check what other properties in the area are renting for. All of this can be done on RealEstate.com.au or Domain.com.au. If you are having trouble finding enough rental properties then step #4 will give you more properties to work with.
The key here is to find 3 types of properties
A. Properties Not As Good As Yours
You want to identify properties that aren’t as good as yours so you can work out what NOT to charge on the low end of the spectrum. This will stop you from charging too little for your property.
B. Properties Better Than Yours
You then want to identify properties that are better than your property. This will show you what you CAN’T charge.
Together the lower and higher prices create a price lock of lower prices you shouldn’t charge and higher prices you can’t charge. This will give you a range to work within for your investment property.
C. Properties Similar To Yours
Next step (if you can) is to narrow your price range even further by finding properties very similar to yours and seeing what they are renting for.
Finding these 3 types of properties should give you a price range of less than $50 for what you should charge for your property.
5. Pretend To Be A Buyer
If you couldn’t find enough rental properties using the techniques in step #3 you can begin to look at properties FOR SALE instead of properties for rent.
To find the rental yield of these properties simply email or call the real estate agent and say something along the lines of “I am thinking of purchasing this property as an investment. Are you able to give an indication of how much it will rent for in it’s current state?”
The real estate agent will hopefully respond with a rental figure. This will give you more figures to work with and really understand what a property will rent for.
6. Ask Local Agents
Approach local agents in the area and let them know you are trying to work out what your property will rent for and may even be considering changing rental agents. Although you may not believe you want to change rental agents when the valuations come back you might change your mind…especially if one valuation is really good.
The local agents should be able to do an analysis of your property and estimate what it would rent for. They may require a walk through of the property or they may be able to go off photos if you have good photos of the property.
This strategy will give you the most accurate estimate of what your property will rent for.
7. Test The Market
At the end of the day you need to test the market. If a real estate agent tells you one price but you think you can get a bit more (or you want to charge a bit less) then that is completely up to you and you can do that.
Put your property on the market and test the response. A rental property for a good price will get a lot of interest, whereas a rental property for a bad price won’t get much interest at all.
Open houses are a great way to see the interest, however you might not want to wait a week until the open house is on to get feedback. If this is the case don’t schedule an open house and put the time online – instead request people call you (or the agent) to inspect the property.
Lots of calls means lots of interest and you have either priced your property right or too low. No interest usually means your property is too expensive or your marketing sucks. So either lower the price or put up a better photo or description asap.
8. Do Something To Raise The Rents
Not happy with the market rate for your property? You can
A) Wallow in pity and self defeat
B) Do something about it
Check out this post about increasing rents for under $1,000 or speak to your real estate agent about what you can do to get a better rent for your property. It might be something as simple as adding a dishwasher, adding air-conditioning or doing a neutral paint job to cover up that hideous wallpaper or those pink and purple walls (yes they do decrease the value).
9. Get Professional Photos Taken
It’s 2015 people!
Potential tenants are deciding whether or not to live in your property before they even inspect it. They are deciding on their next property in the comfort of their living room.
It amazes me how many agents think they need to get people to the open house and then “let the property convince them”. Maybe that worked in 2005…but it doesn’t work anymore.
Your property listing has give them a feel for the house and make them want to live in there.
Tenants only come to open for inspections now to confirm whether or not they can live in a place. They don’t waste their time visiting places they aren’t sure about. So get professional photos taken or take REALLY GOOD photos yourself.
10. Raise Your Rents In Line With The Market
Once you do secure a tenant it is important that you raise your rents in line with the market. By constantly raising you rents by small amounts you can ensure your tenant doesn’t feel they are being ripped off (thus they are more likely to stay) and you are less likely to fall behind the market valuation for your property.
When increasing you rents always look at the market for guidance but in most cases it is wise to stay below the recommended rate set by the government (inflation plus 20%).
For forms on increasing the rent plus the complete kit for self leasing your property get The Complete Self Leasing Kit.
So there you have 10 steps you can take to work out how much rent you should charge. I hope these tips help you maximise the weekly rent you can command for your property and you get the maximum return on investment possible.