The way that maximum affordable rent is calculated is usually based on the earnings of the person looking to rent. When figuring out how much to charge for rent, it’s important to look at a lot of facts and figures showing how much people in the region make. If the idea is to charge 1/40th of a person’s income each month per rent, you’ll struggle to rent out a $3,000 apartment where the average earnings are $30,000.
Here are a few things to consider when coming up with the right number to calculate your tenants’ other bills and responsibilities.
Look At the Rental Market
The rental market is the quickest way to do a back of the envelope calculation of how much to charge for rent. Some people abide by the 2% rule but that’s only when no other metric is available.
There are high-value markets where the rent is low. That’s because of a gap in earnings between the two markets and the fact that there’s a demand but perhaps too much supply. A town that builds lots of luxury housing for a working-class market is going to suffer.
The season that you’re renting in matters too. You need to look at overall trends. When you’re renting in colder months, you’re likely to only be able to charge a fraction of what you could get in warmer months.
Also, consider the other elements of what your potential tenants are going to be paying for. In a region known for high water bills, where you pay for trash pickup, and where energy prices are steep, rents are going to be cheaper. That’s because the total cost of living needs to equate the average earnings of a renter.
Your competition is your best guide to seeing what you could earn. However, if you want to outdo them, you need to find ways to make your property attractive with either lower prices or other incentives
Check Previous Utility Bills
If you want to get a feel for how much water, electricity, and gas cost in a market you’ve just broken into, get previous bills. The utility companies commonly provide this information to people looking to rent out a property or someone moving in. This puts everything on the table for making financial choices, a net good for everyone.
Keep seasonality in mind here as well. There are going to be fluctuations between how much something costs in a warm season versus a colder one. There are also market issues wherein gas prices go up for a year versus another where they’re extremely low.
However, on a long enough timeline, you can easily come up with an average. Make sure that you calculate these real numbers alongside how much people are usually paying. If it’s typical for landlords to pay costs for water, trash pickup, or heating, as is the case in NYC, then you need to add those numbers correctly
Look at Your Own Costs
Think about how much it costs you to own the property. If you haven’t completely paid off the property, consider how much rent is going to contribute to your loan. Consider the fact that if you want to profit off this property, it’s going to have to be high.
Some landlords rent out properties and live off the benefits. Some rent out just one or two properties and the paid off the property is itself the incentive. It all depends on the business model you’re working off of.
If you’re hoping to build a real estate empire, you’re going to have to charge more than the average rent. However, you’ll have to offer something that other landlords on the market aren’t offering.
There should be annual tax bills and other fees to consider. Your local county office should be able to provide all the information that you need to know about these things. While they might not be able to offer concrete numbers, they can offer an estimate.
Renting a property can be lucrative but it can be costly if you mismanage your costs. Think carefully before investing and setting your price.
Consider the Job Market and Demographics
Looking at the overall region is a smart move before you start investing. However, you need to constantly be looking at the direction of the market in order to profit. if the market takes a dive, you need to hop out of your investment fast.
The local job market will determine how many people are looking to rent and how much they can afford. Also, consider the region and its demographics. The number of people with advanced degrees and the types of work they do can impact your overall rental price.
Some regions that are nearer to a high traffic financial center, a high-end research institute, or a major hospital can attract higher rents. that’s because you can offer housing in the proximity of where potential workers are employed.
Just make sure you know how to pitch to this demographic.
If the overall market is filled with transient students or other young people, you’ll need to prepare your property in a different way. There’s no single way that works for every single demographic or market but looking at your competitors is a way to get a clue. Their approach, if successful, could be a template of how you should set your pricing and list your property.
Figuring Out How Much to Charge For Rent is A Challenge
When deciding how much to charge for rent, you need to learn a lot about the region’s demographics. You also need to consider other factors. For example, rents in southern New Jersey are low versus cities close to New York City where landlords can charge more since people earn more working in the city.
If you’re considering renting out your own home, check out our guide for tips.