How are Rent Prices Determined?
Like everything in 2022, rent prices have risen and this has left a lot of renters frustrated. Landlords and property management companies (like us here at IPM) get the brunt of this frustration when we are accused of price gouging and/or taking advantage of renters. This couldn't be any further than the truth and a lot of that frustration comes at not having the knowledge of how rent prices are set. So, for once and for all, lets settle this.
For the sake of this blog post, pretend that you are a first time investor and have bought your 1st rental property and you need to know how to price it for todays market.
How Much Should I Charge for Rent?
When you're trying to determine how much rent to charge, there are a number of things you need to think about. First up, you need to figure out what your home's currently worth in the market. That amount could be different than the original price of the home. An appraiser can give you a more accurate assessment of what it's actually worth, based on the condition of the home, local home sale prices, and where the home is located.
The amount of rent you charge should be a percentage of the home's market value. Typically, the rents landlords charge fall between 0.8% and 1.1% of the homes value.
For example, for a home valued at $250,000, a landlord could charge between $2000 and $2750 each month. For homes that are worth less than $100,000, it's best to charge rent that's close to 1% of its value.
Other than your home's worth, you also need to consider what other landlords are charging for similar rentals in your area. A website like Trulia can show you how the rental rate in your head stacks up against the rates your competitors are offering.
If you're renting out your house and you still owe money on it, the rent you charge has to be at least equal to the cost of your monthly mortgage bill. Don't forget about factoring in an estimate of repair costs, taxes, homeowner fees, and insurance when you decide what to charge.
One other thing to keep in mind: You can't necessarily choose whatever rental rate you want. Some states limit what landlords can charge for rent, security deposits, and late fees.
I think I can speak for most property owners/managers and say that we also want to see prices go down. We do not like having to raise rental prices, but when the market deems it necessary, we must in order to cover all the costs associated with the rise of inflation.