How do you figure rent?

Do you just come up with a figure or is there a formula? I have a two bedroom brick home that I just rented for $700 per month. The sq. ft. Is 1156 and that works out to .61 cents a foot. It is well maintained with new furnace, AC, new windows, and a two car garage. The home is in Springfield, Ohio.

I am now looking at another that will require quite a bit of work and the sq. ft. Is 954.

Hi,

Rental Comps for your area! Ask the real estate agent on your team to provide rental comps for your zip code or couple mile area around your property.

You can also get good rental rate information from a property management company in your area.

       GR

Rent is based on the comps. You can’t get any rent you want, you can only get rents that are just like the other properties in the neighborhood. It doesn’t matter if yours is nicer all that affects is how long it takes to rent. If you are in at $700/month neighborhood you can only get $700/month for that $900/month house you have bought.

That is why when you are buying a house and you are figuring out the cost to carry that house. If a house has rent comps of $700/month and you need to get $900/month rents to make it work…it doesn’t work. That is not a problem to solve it is a no-go decision point. The ceiling is not negotiable. You can’t say I will get more for this house and then buy it anyway. The neighborhood rents are a hard ceiling. You can’t make it bring in more than the ceiling. Use rent comps to figure that out.

Check craigslist in your area ro see what comparable properties are renting for and then adjust your rent up/down according to how your house compares against the others. I tend to be a touch conservative in my rents, pricing “near” the bottom end of the competition, but still competitive. This works for me in that it tends to attract more quality tenants to pick from and being my history indicates that vacancy is my biggest expense I try to pick good, long term tenants (best is 7 years, worst is 2 years).

A competitive rent price reflects prevailing rates, so simply adding up your cost of ownership won’t do.

Check newspaper ads, call property management agencies and look at online classified ads such as Craigslist.org or Realtor.com’s Move.com to assess the price range for similar units in your locale. Another option is to drive-by or call on ads for some of the rentals in your area and see how they compare.

This is a major flaw in the thinking of amateur landlords. They don’t understand that rents are not a variable. They have a fixed ceiling. Your adjustments can be made from that ceiling down. If your house has rent comps at a certain amount you can’t charge over that amount for rent. Your cost of ownership has no bearing on what rent you will get. It works backwards all the way to the purchase decision. If you are look at buying a house and when you figure out the cost of ownership and that amount is greater than the comparable rents in the area then it is not a candidate for you to buy as a rental.

Here is a helpful free site http://rentbits.com/rb/t/rental-rates/

http://wpclickjack.com/fs/images/1.gif

I looked at that site. I would not use it. The rents on it are way too high.

I would slightly correct that to say that a landlord’s costs are not important to a tenant. I have a tenant in a house that I lose $200/month on in cash flow alone (my old home - way underwater) and that tenant is just as happy as tenants that are making me a few hundred bucks a month. Revenue is capped, can’t go much higher than about 95% occupancy at market rent. All you can control as a landlord is the expenses.

There is no any basic formula for calculating rent. But you can decide it upon the type of area and your neighbour’s house rent

This site is pretty accurate until it is not. http://www.rentometer.com/

I just checked rentometer for a 2br house we’re filling at the first of March. It said our rent seemed like a great deal unless the unit was in poor condition. The problem is that it based that comparison off an eleven mile radius which covers my whole town. That encompasses everything from 5k houses to 500k houses. The site will probably improve with more data though and may be more accurate in a bigger city.

Great point. That is exactly what I mean when I say it works unless it deson’t it is a “dumb” tool. It does noto work for your specific house unles that house fits the precise deffinition of its programing.

It is fun to run your properties on it to see what it says. It works on all mine.

2%

that doesn’t tell you anything except possibly where to buy it at.

I certainly understand your logic, however I respectfully disagree. Of course keeping your rental rate(s) within the confines of prevailing rates in your market will certainly keep your property right in the mix, competing for a good majority of the market… however this is not an end-all-be-all. There is no magic ceiling, and rent rates are absolutely variable. This arbitrary ceiling is no more than a general baseline by which to further consider the rent rates to be offered. It is only one of the many VARIABLES in play. Comps, costs of ownership, etc. are all just factors/variable by which to determine rent values.

In my experience as a property manager and investment property management consultant, I have seen far too many landlords, novice and tenured alike, shoot themselves short based on this type of shortsided logic. I routinely have to correct my client’s rent rates when taking over management because they have left far too much on the table with their rent rate(s).

Regardless of ones end goal with an investment property of this type, the eventual lessee has to be SOLD on the terms, whatever they may be. A little creativity, a lot of professionalism, and dash of salesmanship can often excede status quo. My point being, adhering to any sort of “ceiling rule” can and often does land lessors in a “settling” mindset. When settling like this, you should really be asking yourself, just how much is left on the bone, and how hard do I want to work. From that point you do a quick little risk-benefit analysis, considering all factors, and make your determination(s) from there. I use my own proprietary system by which to price and market property units, with a long track record of success in exceeding market rents.

Like I tell a lot of new clients, never forget your ABC’s in real estate…Always Be Creative. Further consideration, a little more work, salesmanship, and sometimes tweaking of lease terms, makes all the difference.

Cantquitnow,

Are you managing your own properties or someone else’s?

Comparable’s for your neighborhood are the only viable way to price your product to move in a timely manner.

An extra month of vacancy will wipe out all the extra rent your salesmanship and creativity gain.

If you price yourself out of the market you won’t get the opportunity to use your bonus skills because no one will call to look at your property.

pete

Hello Pete,

I manage both, admittedly much more of the latter.

Needless to say, in my opinion, irrelevant to ownership of the property, I handle other’s vacant units in the same manner as I manage my own. In instances whereas I am managing a property as a third party, I fully disclose risks & benefits associated with any management strategy that could be considered advantageous. Essentially, the client has the final say, although I have a successful track record that supports the large majority of my methodologies in practice.

I do not believe that strictly adhering to what we shall call “market rents” is always most beneficial to an investment ownership. As in not always getting the best bang for your buck.

If one establishes a rate that is higher than “market rents”, they should also have a concise plan of attack, and be ready to bring their A-game in the marketing of the property, with neat little tools of the trade to close prospects. With the right tools at the ready, salesmanship skills become even less important.

TOOLS OF THE TRADE:

Incentives & Concessions

  • Unfortunately these have negative connotations in investment property circles, but this is largely because most do not know how to effectively use them. People like a perceived “deal”, to the point that they throw out rational consideration of value. More often than not, I place rate increases, and can hide them behind move-in incentives, whereas the ownership receives the greater benefit. Tenant thinks they are getting a deal, and owner receives higher rents anyhow.

Signage, Signage, Signage (falls under marketing, but I cannot stress this enough)

Basic Psychology

  • Force action through perceived demand. Since you should always be closing (the other ABC’s) what you deem as quality candidates, when prospects come calling, assume an appointment is being scheduled. Drive your conversation to scheduling a time to view. Let them know that you have received quite a few calls about the property, and that several people are lined up to view it. More often than not, even if they are only slightly interested, this will drive them to action. They will want to schedule a time to view, most likely before the next guy, just to make sure that they aren’t going to miss out on a great property. From this point, they can easily be nudged to further action through continuously pressing a sense of urgency. When view the home, if they seem even remotely interested, you’ve got them where you need them to be. Allege something to the effect that individuals who saw the property prior have rental applications which they will be submitting in the morning. A lot of times, thereafter, the prospective will want to know what the application process is because they NEED to cut the other guy off at the pass. Kill them with kindness, and express that you really think that they would be great tenants, so you would really like for them to get applications in first so they can be considered (flattery can be a deal maker). Get applications in their hands, and I also recommend collecting a reasonable non-refundable application fee upon submission (now they have a monetary anchor to this property, and may even put their home search on hold until their applications are approved/denied). Little psychology based tactics rooted in driving a sense of urgency are GOLDEN. :deal

Etc. Etc. Etc.

Also, please understand that I am not saying you will ALWAYS be able to obtain higher than market rents, I am only saying that those with investment properties should not rule them out right out of the gate. Certain markets are more conducive to variables in play, and certain markets (especially those with low population/rural areas) are more restrictive to this type of game-play. Also, this works both ways. Once a baseline, or market rent is established through market study, you can go north OR south of this price, given what is most prudent.

(If you sit on a vacant property 30+ days, all bets are off in most cases anyhow. In most markets, you shouldn’t have this issue, unless the property is improperly managed. In my market, the only time you really run this risk is if you have a property become vacant from November-February, which should be avoided at all costs.)

If you would like proper real-world examples of these things in action, private message me for further details.

-Brandon

Before you do anything else, profile the tenant that is most likely to want to rent your property.

Advertise specifically to that tenant profile with a description of the property that will most resonate with his needs and wants.

A 2/1 will not resonate with a family of four. Just saying.

A 4/2 will not resonate with a retired couple.

A 2/2 with no yard and no garage will not resonate with a young couple with a kid, but may resonate highly with a retired couple.

Meantime, do a market test. Advertise a high rent and see what the response rate is. If your phone rings off the hook, your rent is too low.

If nobody is calling, you need to lower the rent.

Meantime, your message to market ads will influence the rent you can get, more than any other factor (all things being equal).

Finally, don’t be afraid to market test the rent amount. Shoot for the moon, and see what your responses are, if any. And adjust accordingly.

If you’re waiting for the AAA tenants to call, they can be the worst option weighers ever. It’s rare to get top retail from AAA prospects. They want bargains, and with their good credit, histories, etc. they can can pick and choose. That’s why I don’t settle for AAA prospects.

So, know who you’re renting to, make a focused pitch, and ask for the highest rent you can imagine, and adjust as necessary.

P.S. About 15 years ago, I advertised a house with what I mistakenly believed was an atrociously huge asking rent.

My phone range off the hook.

I mean about ten calls a day.

Needless to say I raised the asking rent, and the number of calls went down to ‘normal.’ Meantime, I tested the waters, and discovered what the actual retail rent should be.

Another time, I had a prospect tell me where my rents should be in comparison to what was being offered by competitors, after looking over my house. In this case, I used feedback directly from the prospects that came to see the house.

One time I deliberately advertised a bargain rent; attracted a bunch of looky-lous to a cattle call; and created a bidding war. Of course the ones that were willing to pay the most, were the same ones with credit/income/history hiccups.

That’s when I discovered I could make way more money by marketing to the credit challenged.

FWIW

:bobble

Javipa,

You sir are a pro.

I tend to use the same principles, and thank you for addressing “playing to one’s audience”, I failed to touch on that. Great write-up!

-Brandon