Deciding how much to charge for rent is one of the hardest parts of owning rental property, but it's also the most important. It's tempting to price the property sky high to earn as much as you can, but doing so will turn off potential tenants and leave the unit sitting vacant.
Setting the perfect rent rate ensures that you're generating enough income to cover your expenses and turn a profit, while also staying competitive in the local real estate market. Charging the right amount will attract your ideal renter, as well.
If you're not sure how much to charge for rent, check out these tips for help:
Research local rental laws
Rental laws vary by state and municipality, and some areas have rent control laws that set caps on how much you can charge for rent. The rules may also limit how much you can raise the rent each year.
California, New York, New Jersey, Maryland, Oregon and Washington, D.C., all have rent control laws, according to the National Multifamily Housing Council. It's always a good idea to talk to an attorney about what's required or allowed in your area.
Pay attention to the local housing market
The local housing market will determine how much to charge for rent. Rent prices have increased about 20 percent over the past year, according to Apartment Guide. A one-bedroom apartment averages $1,660 a month nationally, and a two-bedroom is $1,964. Demand for rental property remains high and the stock of properties available is low, so prices will likely keep going up, the National Association of Realtors says.
Look into how rent prices have changed in your area over the past year or two. Reach out to other property owners to find out how they've adjusted their rent prices. Another option is to talk to a local real estate agent. They can visit the home and give you their perspective on the rent price.
Check out the prices of similar properties
One of the best ways to decide how much to charge for rent is to look at how much similar properties in your area are going for. Browse sites like Rent.com or Apartment Guide.com, which let you search by neighborhood and property features, such as the number of bedrooms and bathrooms and other criteria, including whether you allow pets. Also, check out sites like Craigslist or Facebook for property listings.
Schedule viewings of other rentals to get a sense of how yours stacks up among the competition. When comparing properties and prices, pay attention to the condition of other units compared to yours, the age and condition of the property and any amenities that the homes offer.
Consider the 1 percent or 2 percent rule
Some financial experts suggest that the 1 percent or 2 percent rule can help you figure out how much to charge for rent. Under this rule, multiply the property's purchase price by 1 percent (or 2 percent) to determine the minimum you should charge for rent each month, according to Rocket Mortgage. To factor in repairs and expenses, add those amounts to the purchase price before multiplying by 1 percent.
For example, if a home costs $200,000, the minimum rent is $2,000 if you apply the 1 percent rule and $4,000 for the 2 percent rule.
The 1 percent or 2 percent rule is just a guide and best used when deciding whether to invest in rental property in the first place. Once you calculate the rate for your home, compare it to the rent of similar properties. It's often best to rent properties more in line with the local market.
Integrate amenities into the rent
With the demand for rentals so high, adding extra amenities helps properties stand out and attract tenants. So, consider covering the cost of parking for renters, paying a utility bill or waiving pet fees.
Also, factor into the rent price the property's features and existing amenities that would be most desirable. For example, apartments that overlook a garden will be more popular than ones with a parking lot view. Properties with balconies, located on higher floors or have new appliances and recent upgrades might command a higher rent.
Factor in expenses
Several expenses come with owning rental property, including mortgage payments, repairs, maintenance, taxes and insurance. Some suggest setting aside 1 percent of the property's value each year to cover maintenance and repairs. Insurance on a rental home is up to 20 percent more than a typical homeowner's policy and can average more than $1,000 annually. Taxes vary by location.
Tally up how much you spend on the property each year and factor it into the rent amount. The goal of owning rentals is to cover your expenses and turn a profit, so don't leave money on the table by not factoring these expenses in the rent.
Use an online rent calculator
If you're still struggling to decide how much to rent your unit for, use an online calculator. Though it's geared toward helping renters budget, the Rent.com Rent Calculator and ApartmentGuide's tool can serve as a guide for setting a rent price. You can plug in different income amounts and locations and determine what's affordable for renters in your area.
Decide how much to charge for late rent
When setting the rent amount, also consider how you'll handle late rent payments and if you'll tack on late fees. Some state landlord-tenant laws restrict charging late fees or set guidelines for how and when you can charge them.
Be sure to put your policies for when rent is due, how to pay it and any late fees into your lease agreement. Typically, late fees don't apply until three or more days after rent is due, and you can charge a flat rate, often a percentage of the monthly rent, or a daily fee, which is a set amount charged each day the rent is late.
Being as flexible as you can with renters benefits everyone. If someone is struggling to pay rent, keeping the lines of communication open and working with them will go a long way in establishing trust and building a solid relationship with your renter.
How much to charge for rent
Several factors go into determining how much rent to charge. But pricing your rental right is crucial — it keeps the property rented and generating income. After all, vacancies are costly.