The whole of idea of being a property owner is to make a profit over time through positive cash flow. You purchased your property, maybe fixed it up, got it into good shape for someone else to occupy and put it on the market to attract a tenant.
You set your rental price from the get-go, and now that the tenant has signed a lease for your property, you are starting to reel in the return on your investment. But as time goes on, are you maintaining the same level of profit you had when you first rented your property? Are you staying up-to-date on rental prices in your market?
Cash flow is a fairly simple calculation of your income minus your costs, but how you arrive at that income number – and whether that income number is too high, too low or just right – takes some more investigation and research.
What is a good price to rent ratio?
Price to rent ratio will give you a good sense of whether the market you are in is better for people to rent or own a home in, and how your property measures up in this calculation. A price to rent ratio tells people whether the price of purchasing a property or renting a property is high or low in a specific location.
To calculate price to rent ratio, you need to divide the average property price of a region by the average annual rent. For example, if the average property price of your region is $525,000, and the average annual rent is $21,000 (or $1,750 per month), then the price to rent ratio would be 25.
Generally speaking, a price to rent ratio of 15 or lower means it is cheaper to purchase a home than rent in a given area. Between 16 and 20, it’s moderately wiser to rent rather than purchase, and 21 and above, it’s definitely a smarter financial decision to rent rather than buy.
How do you raise rental value?
There are a number of ways that you can raise the rental value of your property. The most impactful way is to ensure your property stands out from the rest on the market, especially in comparison to similar properties to yours. The better your property looks, functions and shows compared to other properties of similar size, location and details, the more attractive it’ll be to tenants – especially if you’re rental price is competitive as well.
So what makes one property stand out from the next? Just like if you were buying or selling a home, the two most important rooms in a rental property are the kitchen and the bathroom(s). If either of these rooms needs updating, then spending the time and money there are more likely to return more income than focusing on other rooms. Sometimes, these rooms just need to be cleaned up nicely for when prospective tenants are browsing your property.
Other ways to raise rental value are to appeal to the masses in your design and layout, as the more people who your property would appeal to, the more likely you are to find a tenant. Finally, you should consider adding extra value to the property in the form of upgraded appliances or a security system if you’re property is located in a very competitive market.
How much profit should you make on a rental property?
The most effective way at analyzing how much profit you should make on a rental property is by figuring out the capitalization rate, or cap rate. Basically, the cap rate is a percentage determined by dividing the net operating income of your property by the value of your property.
The net operating income is your annual rental income minus your operating costs. For example, if your annual rental income is $14,400 ($1,200 per month) and your operating costs for the year are $2,500, your net operating income would be $11,900. For this example, let’s say the value of your property is $200,000. Dividing your net operating income by the value of your property would give you a cap rate of 5.95 percent.
But is that good? Under this scenario, the answer would be no. Most real estate investors aim for a cap rate of around 10 percent, but anywhere between 8-12 percent would be acceptable for rental properties, based on the averages across the U.S.
How does seasonality affect rental prices?
Just like the real estate re-sale market, seasonality affects prices in the rental market as well. Interestingly, online rental searches are quite high in the early months of the year, but actual moves don’t begin to pick up until the spring, peaking in the late summer months.
This all makes logical sense if you think about it, too. Fall has always signified the start of school – whether it be for college kids who will rent apartments before the semester starts, or whether it be families who want to get into a new rental property before school starts for their children. As such, searches for rental properties and moves are very high in the summer and peak in August.
Just like anything else, rental prices peak in this time as well, in a simple case of supply-and-demand. As the demand for rental properties is higher in the summer months, rental prices are typically higher as well. This trend, of course, applies to year-round rentals and not seasonal vacation rentals, which obviously have much larger fluctuations based on seasonality.
What is the relationship between rental prices and housing prices?
Rental prices and housing prices are loosely correlated measurements. When housing prices go up, rental prices don’t necessarily follow, for example, and vice versa. At the same time, if housing prices rise to unaffordable numbers for the majority of potential buyers, then landlors could see this as an opportunity to increase rents as rental properties become in higher demand.
In other words, it’s important to be in tune with the re-sale market as well as the rental market in your region so that you can make informed decisions about how much you should charge for rent. Ultimately, you want to ensure you are getting a good cap rate on your property while still falling within a good price to rent ratio for your market.
Should I join a local landlord’s association?
One of the best ways to stay up-to-date in any industry is to join an association that promotes that industry. Joining a local landlord’s association can be a great way for you to network with other landlords in your market and gain insightful information on properties for sale, rents others are charging and information on updated laws that regulate rental properties.
The association’s members could also be a great resource for you if you are having difficulty with a tenant, or if you want to get some advice on what you might be able to charge in rent for your property. It never hurts to have insight from other people who are doing the same thing as you are.
How do I conduct rental research?
There are a number of ways you can conduct rental research, but your first resource should be a rent estimate tool. On HomeUnion®’s website, you can search for any property by address and find information about the rent, price and operating expenses for properties throughout the country.
Not only will this tool give you a great starting point for how much you can charge in rent, but it could also give you a solid base from which to work if you are thinking of purchasing a property as a rental property for you.
How Do you Calculate Rent?
The best way to land on a rental price is to make a few different calculations and then weigh them all together. First, you should figure out:
Your operating expenses and what you’d need to charge to result in positive cash flow
What the market says would be a good rental price to charge
Once you figure out those numbers, you’ll be able to see, first and foremost, whether your property has the potential to be a good investment in your market. If the answer is yes, then you’ll want to take it a step further to land on a final competitive and attractive rent number. To do this, you should ensure your property has a good price to rent ratio (which would make it attractive for tenants) and also has a good cap rate.
The last thing you can do to ensure your property is attractive is to price your rent slightly below comparable properties in your market. This way, you stand out from your competition and attract a tenant faster.