Renting out a property, whether it’s your home or an investment property, is a powerful way to generate cash flow. An aggressive rule of thumb says rent should be about 1% of the property’s value. However, it’s important to consider multiple factors, like market trends, amenities, seasonality, financial needs, rent control laws, and rental inclusions, when learning how to calculate a rental rate. Read on to determine how much you can rent your house for, along with the key deciding factors.
Although there are many valuable strategies to learn how to calculate rent, Zillow offers tools that help you research rental rates, search for properties, and gather property data. Zillow is one of the most efficient ways to find and compare properties to find the right rental pricing for your local market. Plus, it’s free to browse and provides a rental manager for landlords to list and market properties. Start using Zillow to better results today.
Calculate Your Rental Rate
As mentioned above, the general rule of thumb when calculating how much you can rent your house for is 1% of the property’s value. By this estimate, if the house is worth $300,000, the 1% rule would say that the monthly rent should be $3,000. However, the national average price of rent is $1,326, with single-family rentals averaging $2,018. It’s important to note that the 1% rule generally calculates aggressive prices that may be significantly higher than competing rental pricing in your area.
Calculate how much you should charge for rent by inputting the following variables:
Purchase Price of Property X Percentage of Property Value = Rental Price
- Purchase price of property: Input the price you paid for the property.
- Percentage of property value: Input the percentage you would like to charge for rent determined by the market value of your property. Typically, this is 1% but can be higher or lower than that amount, depending on your property.
A more realistic range may be between 0.8% and 1.1%, depending on your location, home type, amenities, and the current rental market. For example, homes with 2,000 square feet, three bedrooms, and three bathrooms in Cimarron Hills, Colorado, are currently listed at prices between $395,000 and $556,000. However, the prices of similar homes available for rent range from $1,900 to $2,700. Depending on your market, calculating a slightly lower or higher percentage may be a more accurate method to calculate rent.
The 1% rule is a good way to start narrowing down the price point, but there are some additional considerations to help you learn how to determine the rent price of a home the most accurately. Consider the factors below to determine whether your property’s rental price should be increased or decreased.
6 Factors When Deciding How Much You Should Charge for Rent
There is no hard and fast rule that shows real estate investors exactly how much you should charge for rent, but using the 1% rule along with thorough research will make your decision as clear as possible. By researching and evaluating important details and performing a rental market analysis, you’ll be prepared to list your rental with a strong price.
1. Comparable Properties & Market Trends
When you’re learning how to price a rental property, rule-of-thumb calculations are only helpful for general estimations. For a more effective method of pricing a rental property, research home values, rent prices, and the state of the rental market in your area. In fact, it’s safe to assume that many of your potential tenants will be evaluating comparable properties and prices, so you need to be well aware of competing prices and rentals.
It’s extremely easy to browse local rentals and evaluate prices on Zillow. You can input many criteria, like the number of bedrooms and bathrooms, pet restrictions, and parking, and easily see rental pricing in your area.
As a real estate investor and rental property owner, your methods of calculating how much to charge for rent should be more in-depth. Look for a minimum of five similar properties and perform a rental market analysis (RMA) to gather information on the competition and average rent prices. This is similar to a comparative market analysis done by real estate agents to compare similar properties when purchasing or selling a home, but the focus is specifically on rental properties.
An RMA should already have been completed before the purchase of a rental property to assess the local market and rental potential of an area. Review this analysis and update as needed, depending on how long ago it was done. It should include evaluations of the neighborhood, comparable properties, calculations of rent per square foot, and amenities. Although it can be time-consuming, it’s also important for investors to make wise business decisions and determine appropriate rental rates.
2. Rental Property Characteristics & Amenities
Just like when a house is listed for sale, a property’s features, condition, and amenities impact the number of interested tenants and the price point. If comparable properties are listed for $1,500, it doesn’t automatically mean that tenants will pay the same price for yours. If the condition, characteristics, and amenities are significantly different, you will have to increase or decrease your price to find tenants.
For example, a newly built, renovated, or well-designed home will generally be more attractive to renters than a dated home, even if they have the same number of bedrooms, bathrooms, and square footage. Not all renters are willing to pay hundreds of dollars more per month solely for a new or stylish living space, but well-designed properties tend to command higher rent prices.
On the other hand, amenities provide tenants with convenience and can directly lead to higher rental prices. For example, many tenants will be willing to pay a higher price for a home with appliances included, since it costs thousands of dollars to purchase appliances and can be incredibly inconvenient. However, some tenants might want a pool on-site, but may not be willing to pay a higher monthly cost to have one.
There are generally two types of amenities that contribute to calculating rental rates:
- Community or on-site amenities: These are available and would benefit everyone living in the building or homeowners association community. They may include a swimming pool, game room, valet parking, fitness center, or on-site laundry center.
- In-unit amenities: These are only accessible within the rental units. They may include a terrace, washer and dryer, walk-in closets, or dishwashers.
There isn’t a rule or specific calculation for how home features and amenities affect the house rental cost. However, having the most desirable amenities can put your property in the high range of comparable rentals. In the same way, lack of amenities, maintenance agreements, or dated property features can put your unit in the lower range of comps. This is one reason why it’s important to know your neighborhood, demographic, and amenities that are the most desirable in your area.
In general, here are some factors and amenities that affect your rent price:
Pro tip: In some rare cases, the owner and tenant will make an agreement for the tenant to make changes and improvements to the property. This can be done for a rent discount or with an allowance, depending on the scope of the project and the agreement. If this seems like a fitting plan for your property, read more about it in What Are Commercial Tenant Improvements & How Do They Work?.
Learning how to determine the rent price of your property in different seasons is a major factor in learning how to rent your house. Renting is a heavily seasonal business, with the peak season typically during the summer, around May through August. For example, the summer season of 2021 showed rent growth consistently of 2% or more until the fall season. In general, people want to move during the warmer months, creating a higher demand for rental properties of all kinds.
Another reason for this peak is because of the school year. Parents of school-aged kids prefer to move in between the calendar school years, and college students are searching for apartments and moving in at the same time. Because the demand for rentals is higher in the summer, landlords and property owners charge more for the same property.
On the other hand, listing a rental in the dead of winter means there will be less demand and more competition for pricing. This may result in having to lower your rental prices in order to get tenants in the door. As you consider how to figure out a rent price that generates profit and attracts tenants, make sure you consider seasonality and how it will impact demand and potential rent prices.
4. Rent Control Laws
There are many laws involved with the process of renting out property, so it’s extremely important for owners and landlords to be familiar with your state and county laws. Every state has varying landlord tenant laws that specify the rights and obligations each party has for the agreement and the rental property.
When you’re learning how to price a rental property, it’s vital for you to understand rent control laws. In most states, rent control restrictions are imposed by each municipality, so you might even have different requirements for multiple rental properties. These laws can restrict rental price increases, so you need to clearly understand your state and local laws before you set your rent prices the first time.
There are currently five states plus Washington, D.C., that have rent control laws in place:
Many experienced landlords and rental property owners struggle to understand real estate laws that pertain to them and implement them correctly. If you need more support to ensure that you are complying with property management laws and setting yourself up for success, consider enrolling in “Understanding Property Management Law,” a 90-minute course from Lorman. In under two hours, you can discuss the laws with professionals and access helpful tools to be confident in the laws moving forward.
Lorman is a well-known online education provider with a number of real estate courses for investors, like “Dealing with Difficult Commercial Tenants” and “Collection Techniques for Landlords.” It’s common for new investors to face situations that are completely unfamiliar to them, so Lorman provides in-depth resources and courses to prevent problems, walk through challenges, and improve your success as a real estate investor.
5. Financial Needs
Beyond comparing your rental to the local competition, consider the internal financial needs for your property and your business. All rental properties incur a range of expenses, so you need to calculate ongoing, seasonal, and unexpected expenses in order to set a rental price that covers these costs and generates a profit.
Some of the most common expenses to account for are:
- Mortgage payment: Unless you purchase the rental property with cash, you will owe a monthly mortgage payment to your lender. Consider starting a real estate holding company to get tax advantages and minimize risk on any and all rental properties you purchase.
- Maintenance and repair costs: Some maintenance costs will be regular and ongoing, and you can plan for those with a rental property maintenance checklist. However, unexpected expenses and necessary repairs are inevitable and must be accounted for within your plans.
- Property taxes: Depending on the way in which you purchased the property, you may pay property taxes in your monthly mortgage payment or in an annual sum.
- Employees and vendors: Investors who own multiple rentals or an apartment complex often hire part-time or full-time staff members to help with administration, maintenance, marketing, and a variety of other needs. Your budget must include this expense.
- Property insurance: Rental property insurance protects property owners from liabilities like tenants, weather, and crime, so it is an important element of your expense calculations.
- Property management: Managing even a single property requires a lot of time, effort, and organization. Many landlords hire a property management company to outsource all management tasks, while others opt to use property management software.
Pro tip: Since a residential rental property is a capital expense, the costs of depreciation can provide significant tax benefits. For more information about using this method and including it in your budget, read rental property depreciation rules.
For those looking for an efficient tool for property management that doesn’t involve hiring a full-time company, Avail is an ideal solution. It’s an all-in-one property management software that includes tools for every part of renting a home—including creating rental applications, screening tenants, collecting rent, tracking maintenance, and evaluating new rental properties and prices. It even includes a rent analysis tool to automatically find comparable properties and gather relevant data that shows you how to determine rent prices.
6. Rental Inclusions
Another method to help you determine the rental value of a property is carefully establishing what is and is not included in the price of rent. Utilities like electricity, heat, water, trash, and internet can be left completely up to the tenant or rolled into the rent price if it’s beneficial for your marketing strategy and fits within your budget.
It’s most common for tenants to be responsible for utilities on their own, partially because it can be tedious and frustrating for landlords to manage utility communications and costs for multiple units. In addition, costs can range widely, so these payments can potentially cut into your profits.
However, there are many cases in which including some or all utilities in the cost of rent benefits the property owner. For example, having even one utility covered by the cost of rent can make your property appear more affordable and more appealing to a certain subset of potential renters.
It’s especially preferred for some renters, like short-term or mid-term renters who may pay rent on a monthly or even weekly basis. These rental agreements often include all utilities and maintenance and are sometimes fully furnished, with a price point that accurately reflects all inclusions.
For multifamily property investors, another consideration when you’re figuring out how to calculate the rental rate is whether they will live in the property or not. Many owners of duplexes, triplexes, and fourplexes choose to include utilities in the rent, especially if the property has shared systems for heat and electricity. In these cases, covering the cost of utilities does not add a significant amount of expenses, but attracts tenants more easily.
In addition, it’s important to clearly specify who is responsible for ongoing maintenance needs, like lawn maintenance, snow removal, and minor repairs like changing light bulbs. Although it may seem tedious to plan this much detail upfront, having a clear set of expectations for you and your tenants prevents a massive amount of problems and sets your relationship up for success. Any of the costs that fall on you must be factored into your financial estimates of how much you can rent your house for.
Why Setting the Right Rent Price Is Important
Setting the price of a rental includes many calculations but is not a strictly numerical process. Instead, the desires and priorities of local renters are key in determining rent prices, but there aren’t cut-and-dry financial values for amenities or home characteristics. Instead, you need to do local research to find out what renters in your area want, seeing how the responses stack up with the numbers below.
Learning how to calculate the right rental rate is important for several key reasons:
- Cover costs and generate profit: Without a strong understanding of your property expenses, you can easily set a price that does not break even with your costs. You need to have all the property and rental market data in order to create a margin and generate a profit.
- Attract good quality tenants: Setting a rent price at fair market value is key to avoiding vacancies and attracting tenants who will take care of the property, be respectful, and follow your lease.
When considering how much you can rent your house for, it’s important to spend your time and effort researching your rental market and competing rental rates. By taking all of the above factors into consideration before renting your property, you’ll set yourself up financially for success and prevent many potential problems with your tenants and your property.
Average Rental Prices per State
Rental prices vary drastically throughout the U.S. and even throughout individual neighborhoods and cities. For instance, the median price of rent in the U.S. ranges from $724 in West Virginia to $1,617 in Hawaii. While it’s important to evaluate your local rental market and competing prices, it’s also extremely useful for investors to be familiar with the real estate and rental markets in surrounding areas.
Learn more about the median cost of rent throughout the states below:
Whether you’re an experienced investor or simply renting out a room in your house, you need to answer the question, “How much can I rent my house for?” If you price your rental too high, you won’t attract renters and won’t generate any income. In contrast, charging too little won’t allow you to afford your carrying costs and can create massive financial problems. Use the factors and calculator in this article to help you determine a rental price that will minimize vacancies and maximize your profits.