Determining Market Rental Rates

rentalrate

Over the course of time, the rental markets change.  Part of being a smart investor is recognizing a changing trend and making sure that you are following along.  A rental unit that is priced too high will not rent, or take longer to rent.  A rental unit priced too low means that you are leaving money on the table, each and every month.  Determining the market rental rate before listing an apartment rent is an important skill for any investor, but how are market rates determined?

Without getting into a huge discussion on economics, the market rental rate will be determined by several factors.  One of these factors include supply and demand, where the number of available units may cause prices to go up in a desirable area, or lead to a “price war” in an area with many open units.  Another factor is the ever increasing cost of expenses related to the property.

Some areas have rent controls in place, which determine the maximum amount that can be charged for a specific type of rental.  These are generally found in metropolitan areas, and there are many arguments both for and against.  For questions on local rent controls, contact the municipality which the rental property is in.

When determining the price for a rental unit, the first consideration is making sure all expenses are covered.  Be sure to include things such as mortgages, taxes, utilities, repairs, insurance, and management.  This is called the Gross Operating Expense for a property.  However, this isn’t specific enough for our needs.  It is necessary to know the gross operating expense, per unit, per month!  For assistance in determining these factors, see the article on “What Do Your Rentals Cost You?

Once the gross operating expense per unit per month is known, research is done to determine what the current market rate for similar rental units is in the area.  Comparisons should be based on rental units with the same number of bedrooms, with similar amenities,  and within a reasonable distance (a few blocks in the city to perhaps as wide as an entire county in a rural area!)  Below are three different methods for determining rental rate, in order of least to most technological.

1.  Newspapers & Rental Fliers – This is pretty straight forward.  Pick up the newspaper, flip to the classifieds, and see what other landlord are avertising for similar units.  Rental Fliers are often posted on bulletin boards in public areas, such as grocery stores, community centers, libraries, and in college areas, student unions.

2.  Real Estate Agents, Property Managers, Other Investors – This one is a bit more technologically advanced, as it requires picking up a telephone in many cases.  Real estate agents who are familiar with investment properties will often also know the local rental markets as well.  Property managers may not be willing to hand out information willingly to the “competition”, but will readily respond to requests for more information about an apartment from a potential renter.  Other investors can be contacted via local investment clubs.

3.  CraigsList and Rent-O-Meter – These two can provide a wealth of information very quickly.  Most metropolitan areas have their own CraigsList site, which can be found at www.craigslist.org.  If you aren’t posting your listings here, shame on you!  With a couple clicks, information can be found on apartment listings throughout a city or region.  Using Rent-O-Meter at www.rentometer.com is also a simple service.  By entering the address of the rental, number of bedrooms, and current rental rate, the data is compared to other rentals in the area.  Information such as median rental price, low price, high price, and distance are all provided.  In addition, there is a map showing where other units are located in relation to the unit being priced.  This site does not take into account any amenities, however.

Keep in mind that comparisons should be as close as possible – in bedrooms, location, and amenities!

Once research is compiled, a fair rental rate can be determined based on the data.  A fair place to start would be in the upper third of the price bracket, which will draw a more interested potential tenant, and allow for negotiation room if necessary.

Rental markets change over time.  Being aware of what a rental unit costs to operate, as well as the local trends, will keep a sharp investor on top of the market.  Using the three mthods outlined, a strong comparison of available rental units can be made, and a unit can be priced properly.

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