In this article we are going to answer the common question, “How Much Should I Charge For Rent?”
Marketing your home for lease starts with a comprehensive look at the market. This will help you to better understand what a well-qualified tenant will pay you each month. This research will help answer your question, “How Much Should I Charge For Rent?”
If you choose too low a market rate, you end up not making as much money as you should. If you choose over market rate it takes longer to lease (another money waster) and might be leased to the wrong person.
Why the ‘wrong’ person?
Two Types Of Tenants Who Will Pay Above Market Rent
Well, in our experience we have found that there are two kinds of tenants willing to pay more than market rent for a house.
A tenant who isn’t familiar with the area and therefore unfamiliar with what they should actually be paying. These tenants wise up a few months into the lease and usually end up being short term tenants. They typically leave after a year.
The other type of tenant who will pay you above market rent is worse than the first. This is a less than qualified tenant who is willing to pay more in order to tempt you to overlook their credit shortfalls.
You may get excited that they’ll pay more than the house down the street, but be careful. You will be assuming more risk than is necessary and if it turns out bad, an eviction could be in your future.
When You Ask, “How Much Should I Charge For Rent?” Understand That It Is Both An Art And Science
So finding market rate is both an art and a science.
While you are working on finding the market rate of your home, keep one very important truth we’ve learned – tenant prospects, unlike buyers of homes, have a very short-sighted mindset.
So, when a buyer is looking to purchase a home, it’s not unrealistic for them to take months, or even years to purchase one. Tenant prospects will not take months, much less a year, to find a place.
Tenants tend to have three or four characteristics they are looking for in a home. They will settle on the first one in their budget that checks all those boxes. This is typically for fear of someone else renting the house.
Why is this important?
Tenant prospects will be comparing your home to what is available to them in that time window. Therefore, the most important data you can determine is an accurate measurement of the homes you are competing against.
Let’s look at some techniques we use to find the market rate.
Zillow and Trulia
1. Zillow and Trulia – Formerly two companies, these two joined forces in recent years. If you are unfamiliar with them, they are websites that take local real estate data and extrapolate certain assumptions. These include the value of homes, the future value of homes and the market rental rate of the home.
I routinely hear people snub their nose at the values these websites provide of their home. They cite things like their inability to determine amenities or certain other unique characteristics their home has and assign an appropriate value to it.
And, while they are correct that it is hard for a computer algorithm to determine an accurate value, tenant prospects are looking at these values and find them helpful.
Homes that are too far out of line with these values, typically don’t get as many showings as homes with marketed rental rates that are more in line with Zillow or Trulia’s values. To some degree, they’ve become a self-fulfilling prophecy. Particularly in an age when data is so widespread and available to everyone.
Using Zillow or Trulia is really simple. Just type your address in the box after you’ve chosen “Rent”.
Once you click “Search” you’ll see your property and off to the right will be some nearby properties for rent.
You’ll need to determine if they are really comparable properties or if they’re in a different type of neighborhood or the house is different.
Local Property Managers
2. Local Property Managers – Search the available homes on local property managers’ websites to determine if they have any nearby.
By doing this, you are typically able to determine what the professionals think homes are worth in that area. You can also look at the pictures on their site to determine if the houses have similar features and amenities.
Take our gkhouses site as an example. When you pull up all of the listings we have, you can filter several ways to see any houses we have in your general area. You could then pull up the map view and see if there’s anything close to your house.
Once you find a similar house, just scan through the pictures. Now I can determine based on the 50 photos if this house is similar to the one I’m trying to rent. The question, “How Much Should I Charge For Rent?” becomes easier to answer.
On a side note, we also have software that will pull up comparables for you. If you’re interested, fill out this form and we’ll send you a list of comparable houses.
3. Your neighborhood – Drive your area and look for ‘For Rent’ and call to inquire. When you do this you’re able to ask questions to gauge if the house for rent is similar to your house. It’s always good to do a little competitive analysis as well!
The point is that if you want to find that GREAT tenant for your house it’s best to take the emotion out of it. Do your homework and strive for true market rent.
Great tenants will be happy paying market rent and as we mentioned before, bad tenants will agree to pay ‘above’ market rents just to get in a house.
But there’s a good chance that you won’t get paid steady…if at all…after about four months. It’s unfortunate but true.
And we know from experience, a bad tenant will end up costing you more in the long run.
Trust us on that one.
Another point about finding ‘market rate’ is that your goal is to keep a tenant long term in your house. A long-term tenant is as valuable an asset to you as the house they’re living in. It costs more money when short term tenants fill your properties and vacate after 12 months.
When that happens you will need to spend money to get your house back up to rental standard. And depending on how that tenant left your house will depend on how much money you need to spend!
We hope that helps answer the question, “How Much Should I Charge For Rent?”
If you still need a little help, don’t hesitate to give us a call and we’ll lend you our expert opinion.