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Method 3: Set rent using your own financial needs
Your financial situation and goals can factor into setting the rent. While this might be tricky, it can be a good way to establish a competitive rate that gets a high-quality renter in the door who wants to stick around while also making sure you meet your financial needs.
Determining your needs
Figure out your monthly mortgage payments, taxes, insurance, and other expenses. Consider that maintenance for your rental property can consume upward of 15% to 20% of your potential rental income. You should also determine how much income, if any, you’ll need to pull from your rental income and how much will be used for home-related expenses.
How to set your rent
Base your rent around what you’ll need to meet your monthly financial obligations.
Note that even if you come in low or break even each month between what you pay for your house and what you make in rent, you may still come out ahead because your home is being paid off and is likely to appreciate in value.
Method 4: Set rent using an online calculator
While they might not be totally accurate, online rental calculators can give you a sound basis for setting rent. However, it’s important to find the right calculator and double-check rates against other sources, like comps.
Calculating your rental price as a landlord
Determining the ideal rent for your property involves balancing profitability with market competitiveness. In this simple rent calculator, let’s use a median home value and consider common landlord expenses and market dynamics to illustrate.
Scenario: Pricing a Rental Property
- Median Home Value: $416,900
Step 1: Calculate base rent using home value rule of thumb
One common rule of thumb is to set the monthly rent price between 0.8% and 1.1% of the home’s value.
- Low End (0.8%): $416,900 x 0.008 = $3,335.20
- High End (1.1%): $416,900 x 0.011 = $4,585.90
Based on this rule, your target monthly rent could be in the range of $3,335 to $4,586.
Step 2: Factor in maintenance costs
Maintenance for a rental property can consume upward of 15% to 20% of your potential rental income. While this isn’t added directly to the tenant’s rent, it’s a critical factor for your profitability and should be covered by your gross rental income.
Let’s take the midpoint of our base rent range, say $3,960.
- Estimated Monthly Maintenance (15% of rent): $3,960 x 0.15 = $594
- Estimated Monthly Maintenance (20% of rent): $3,960 x 0.20 = $792
This means a portion of your collected rent ($594 to $792) would typically be allocated to cover maintenance, highlighting the need to set a rent that accommodates these expenses while still leaving room for profit or covering other costs like mortgage, taxes, and insurance.
Step 3: Adjust for market fluctuations
Market conditions can cause rental prices to fluctuate. You can typically expect about a 10% fluctuation up or down in rental prices as housing markets shift.
Let’s assume a base rent estimate of $3,960 based on your home’s value and profitability needs.
- In a high-demand market (10% increase): $3,960 x 1.10 = $4,356
- In a low-demand market (10% decrease): $3,960 x 0.90 = $3,564
Conclusion: Example rental pricing
Considering a median home value of $416,900, a landlord might aim for a base rent around $3,960. However, depending on the current market’s demand, this price could be adjusted:
- If demand is high: You might be able to price your rental closer to $4,356 per month.
- If demand is low: You may need to price it closer to $3,564 per month to attract tenants quickly.
Key considerations for landlords:
- Local comps: Always research comparable rental properties in your specific area to gauge competitive pricing.
- Property condition: Turnkey properties with new features (floors, countertops, appliances) can often command higher rent.
- Financial needs: Ensure your rent covers your mortgage, taxes, insurance, and allocated maintenance costs, with room for desired profit.
- Expert advice: Consulting a real estate professional experienced in rentals is highly recommended, as they can provide precise market data and guidance.
Once you’ve gone through your calculations, set your rent somewhere in the range you found. Consider your short- and long-term goals in renting your home and what financial needs you have as well.
Also, keep in mind a calculator can only provide an estimate, which may or may not be accurate for your situation. It can’t consider other variables, such as features unique to your rental, your specific market, or your financial needs outside of the property.
Finding the right rent calculator
It’s best to use several different calculators so you can get a sense of the price range. Look for ones that take into account a variety of inputs, such as your mortgage, operating expenses, and any fees.
Most of these rent calculators are interactive, allowing you to check how your rental price could fluctuate with your home value. Make sure you’re looking at median error rates or other data to get an idea of how far off the rent could be.
Method 5: Use a real estate professional
If you don’t want to go it alone when determining how much your home will rent for, use the tried-and-true method: consult an experienced real estate agent.
Tapping into your agent’s expertise
Kutter says a real estate agent or broker can be a great guide as you put your rental on the market. They have numerous resources, such as the MLS database, that can provide extensive data and information about the market in your area. Plus, they have on-the-ground knowledge of the area and may know what other homes are renting for.
Lock says to choose an agent who knows what they’re doing and “ideally has some rentals themselves.” The right agent can help you determine how much your home will rent for and even help you with the leasing process, which includes listing and marketing the property, finding and screening potential tenants, showing the property, and assisting with lease signing. According to Lock, the fee to do that is typically equivalent to one month’s rent.
An experienced agent can also help keep you informed of legislation and state laws that may impact the rent price of your home. Factors include rent control and other housing legislation.
Find a reputable and trusted agent who has extensive experience in your ideal location, especially with rentals. Ensure they have the proper credentials you’re looking for, and don’t be afraid to interview a few potential candidates.
This recommendation also applies if you’re looking to buy property with an eye toward renting it out. Working with a top buyer’s agent can help you find the perfect rental home.
How to set your rent
Simply ask your agent, “What can we get for the home?” They will dive into the details, looking at how long the home has been vacant, what similar homes rent for, and what your needs are.
An agent will most likely use a combination of many methods listed here, including comps and your financial needs, to set your rental price. In fact, that’s one of their biggest perks: They’ll do almost all the work for you.
