As a rental real estate investor, knowing how to evaluate the local rental market and set accurate rental rates is essential to long-term profitability. In fact, the rental rate should be one of the key calculations you make before buying an investment property. It’s also important to re-evaluate your rental rate regularly to ensure it stays aligned with the local market. Without this knowledge, you risk vacancies, unhappy tenants, and lost income.
With so much at stake, it’s worth learning how to calculate accurate rental rates and handle rent increases like a pro. Delegating these responsibilities to a professional property management service, such as Real Property Management, can reduce stress, ensure accurate pricing, and help you avoid lost rental income. One of the best ways to evaluate your rental rates is to complete a rental market analysis. This involves calculating the average rent price per square foot for similar rentals in your area.
Evaluating Your Rental Rates:
1. FIND COMPARABLES. Locate three to five rental properties in your neighborhood that are similar in size, age, condition, and number of bedrooms and bathrooms. You can find these through online searches (such as Zillow) or local rental listings.
2. CALCULATE RENTAL PRICE PER SQUARE FOOT. Divide the rental price by the property’s habitable square footage for each comparable.
3. FIND THE AVERAGE. Add the per square-foot amounts together, then divide by the number of properties.
4. APPLY TO YOUR PROPERTY. Multiply your property’s square footage by this average to estimate your rental rate.
Your evaluation isn’t complete until you adjust for amenities. These include both community amenities (parks, transit access, proximity to downtown) and property-specific amenities (technology upgrades, a pool, or included services such as landscape maintenance). Adjust your rental rate up or down depending on which apply. Knowing how to calculate a rental rate is just the beginning. To keep your property competitive and profitable, it’s important to evaluate your rates regularly. Most experts recommend at least once per year, though in hot markets you may need to re-evaluate more often.
Once you’ve determined a fair rental rate, the next challenge is deciding if, when, and how much to increase it. Rental rates are rising in markets across the country, and if yours aren’t adjusted regularly, you may lose income. Even worse, your expenses may rise faster than your rental income, leading to cash flow problems. By tracking your property’s performance, you’ll have good data to guide increases.
Reasons to raise rent may include:
▷ THE AVERAGE RENTAL RATE PER SQUARE FOOT IN YOUR AREA HAS INCREASED (OFTEN BY 2% OR MORE).
▷ PROPERTY EXPENSES (TAXES, INSURANCE, FEES) HAVE GONE UP.
The best time to raise rent is typically when a tenant’s lease is up for renewal. In many cases, you can’t increase rent until the lease term ends. Always know and follow your state and local regulations regarding rent increases, as well as the terms of your lease. Trying to raise rent improperly — such as without notice, or to push out a tenant you don’t want — can result in costly consequences.
If you want to keep a good tenant despite raising rent (and you should), handle the process with skill and professionalism:
▷ GIVE PLENTY OF NOTICE. Many states require at least 30 days’ written notice, but giving more time shows respect and helps tenants plan.
▷ COMMUNICATE CLEARLY. Explain why the increase is necessary and emphasize that the new rate remains competitive for the area. When tenants understand that rents and expenses are rising everywhere, they are more likely to accept the change.
Evaluating and raising rents can be time-consuming and stressful for any investor. That’s why the professionals at your local Real Property Management office are ready to help. With expert insight into your local rental market, they can ensure your rental is priced right and remains profitable.
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