How much rent do I (or can I) charge for my investment property? This is certainly a question that comes up a lot once you start getting serious about investing in real estate. You create the spreadsheets, spend the time going through the popular real estate sites finding properties for sale and gathering data, and you may even visit a number of properties to see what hidden gems are out there. As you get further down the road, you are going to start asking “How can I come up with the correct rent?”
Rent charge is certainly an important variable in your equation. Your cash flow depends on it. Be too optimistic on the rent, and your seemingly positive cash flow could dwindle down to negligible–or worse yet, negative. Be too pessimistic and you might be passing up deals that could actually give you a steady payout, or you could decide that there isn’t anything out there that works (trust me, there is a property for you out there!)
Before stressing too much, make sure to check with your Realtor® or the seller to determine how much the property rented for in the past. If it’s already rented, you’re in luck. You can use this current rent to negotiate, but remember that a lot of people don’t charge the rent that the market will bear. They usually do this in order to keep tenants around and to avoid vacancies. You will need to figure out if it’s worth having a month or two vacancy with higher rents or keeping the tenant in place long-term. Remember that a property manager can help with all of the “tenant headaches” and turn properties quickly. Make sure to get the most out of your property and don’t leave money on the table. Keep a long-term investment strategy worldview–short changing rent could end up costing you thousands of dollars over the years.
[su_animate type=”rotateIn” duration=”1″][contentblock id=subscribe][/su_animate]
Although you need to do a detailed analysis of income and expenses (absolutely necessary), there is one simple rule of thumb you can take with you anywhere (while you leave your calculator at home.) It is called the One Percent Rule. This rule is that you should try to get 1% of the total property’s value each month in gross rent. For example:
$100,000 property * 1% of value = $1000/month rent
You can work this both ways. If a property you like is for sale for $90,000, you should expect to be able to get $900/month rent out of it to have a great shot at positive cash flow. If you find that a property already rents for $750/month or you have found comparable properties in the area renting for that price, you would do well if you paid $75,000 for that property. If it’s selling for much higher, you would want to keep your offer price down at $75,000 as your worst case scenario. As great investors, we don’t pay retail and our money is made on the purchase, so don’t get discouraged if a $100,000 property rents for $900-950 a month. Make an offer that allows your numbers to work. Real estate investing is a business, it’s nothing personal.
“If you’re not embarrassed by your offer, then you offered too much.” – Lazy Mentor
If you would rather get some real numbers, consider driving the nearby neighborhood and looking for rent signs. This is a simple approach, but calling the numbers on the rent signs as a prospective renter can help you get details on the going rental rates quickly. Craigslist and ads from local property managers can also give valuable insight on the rents that will work in your area.
Overall, a very common mantra you may hear, which seems like a Captain Obvious quote but has some power beneath its surface, is “Your rent is whatever you want it to be.” It couldn’t be more true. Don’t forget that you are the one setting the rents, and although the market does set some boundaries for you, the quality of your rental (improvements, etc.), the marketing you do, and the time of year are all factors affecting the amount of rent you are able to charge. Keep the 1% rule close to your vest and invest confidently!