Published by Think Realty | December 13, 2023
As a rental real estate investor, knowing how to evaluate the local rental market and set accurate rental rates is essential to long-term profitability.
In fact, the rental rate should be one of the important calculations you make before you even buy an investment property. It’s also important to re-evaluate your rental rate on a regular basis to be sure that it is still in line with the local rental market. But evaluating rental rates and increasing them both require a degree of knowledge and skill. Otherwise, you could end up with vacancies, unhappy tenants, and lost rental income. With so much at stake, it’s worth spending some time to learn how to calculate accurate rental rates and handle rent increases like a pro. Delegating these responsibilities to a professional property management service like Real Property Management can take the stress out of evaluating the market and adjusting your rental rates, helping ensure you are pricing your rentals accurately and avoiding lost rental income.
Evaluating Your Rental Rates
One thing you can do to evaluate your rental rates is complete a rental market analysis. A rental market analysis is the process of calculating the average rent price per square foot for rentals near yours based on comparable properties for rent.
The first step is to locate three to five comparable rentals in the neighborhood. A comparable property is one that will be similar to yours in size, age, condition, number of bedrooms and bathrooms, and so on. You can find properties for rent by doing online searches (on Zillow, for example) or by looking through local rental listings.
Once you have your comparable properties, the next step is to calculate a rental price per square foot for each one of them. To do so, simply divide the rental price by the property’s habitable square footage. Then, average all of them together to get an average price per square foot. For example, if you had three comparable properties, you’d add together each rental price per square foot, then divide by three. You can now estimate how much you should charge in rent by multiplying the square footage of your rental property by the average price per square foot.
However, your rental rate evaluation isn’t quite finished until you’ve adjusted your rental rate estimate for amenities. There are two potential types of amenities: community amenities, and then those that are specific to the rental property. For example, community amenities could include a nearby park, access to public transit, or proximity to a downtown area. Amenities that are more specific to the property could include things like tech upgrades, a swimming pool, or included services (like landscape maintenance, for example). Depending on which amenities apply to your rental property, you will want to adjust your rental rate up or down accordingly.
