One of the most common questions new and experienced real estate investors have is "how much rent do I charge?" Obviously, this is an important question. Price your units too high and you'll wait by a silent phone, price too low and you are leaving money on the table.
The simple answer is market research. This is the same process manufacturers, suppliers and retailers use to price their goods and services. Market research is simply the process of asking and answering important questions that pertain, in our case, to the rental property market.
Some experts say that you begin by looking in the Sunday paper, Craig's list and the variety of rental papers you find at the supermarket. We don't agree. We believe you start with formulating a series of questions that will provide helpful answers.
Since our blog deals with smaller rental properties (from single family homes to 4-plex) we will look at the analysis associated with these kind of properties. Let's start with making a list of the features of your property:
I like to columize this list so I can rate my place against other properties. Make sure and put a place to record the asking and actual rental prices of the comparable properties you find while doing your research.
Next make a list of questions that may assist you in determining your rental rates.
- Is there a lot of competition in the area right now?
- What and how many medium to large employers are in the area?
- What are people renting?
- Are there quality tenants renting in this area?
- How much are people paying for similar properties, larger properties, smaller properties?
- How much are landlords in the area charging for their similar places, larger places, smaller places.
Next is the research part of the project. There are a lot of sources of information. The problem is much of it has to do with what others are asking for their places verses what actual rents people are getting... a big difference.
We like to start with a variety of sources. Your real estate agent may have data, from his/her MLS, showing asking and actual rents on properties located near yours. Likewise, if you are using a property management firm, they will have access to this info.
Many investors use Craig's List to advertise their rentals. Look for both active rentals in your area and go back through the posts to try and find units that are now off the market. Although not always spot on, this info can suggest prices that at least got calls. Local classified sites like AZCenttral.com in the Phoenix market can give you info. A pretty fun tool is the Rent"O Meter. It is set up for apartments but may give you a good idea of what rates are in your area. You may also want to Google homes for rent "your city name" and check out the web sites that pop up.
There are a lot of investor clubs out there these days. Meetup.com is one way to find them. Other investors can be a great source of information. Remember, rental comps are geographically sensitive so don't expect information on Tempe rentals to help you determine the right price in Peoria.
Once you have gathered the necessary information you should have a good sense of where to price your rental. Be prepared to lower your price quickly if you do not get any interest. Time is money and having a vacant unit get expensive quickly. We are seeing a lot of competition out there right now so you may have to bite the bullet for the next year or two. However, if you have bought right, you can still be profitable.
Please feel free to toss us an email if you have any questions or use the comment area below. We try to respond to all questions within 24 hours.
