July 2020, 5 minute read.
Table of Contents for ‘How much Rent Should You Charge?’
- What affects the price of rent.
- How To Increase rent by 5% to 10% more
- Problems to avoid.
- Top 10 tips on setting the rent at the right price.
Setting the price of rent on your investment property has the potential make or break your investment.
Obviously, we want to maximise cash flow from rental yield, but setting the price too high will scare off many potential tenants.
Deciding the price of rent should be a careful process with many considerations. We have put together some guidelines on how to find the right price for your investment property.
WHAT AFFECTS THE PRICE OF RENT?
Don’t fall into the trap of following over-simplified guidelines that do not accurately represent how much you should charge.
One common guideline is that you should charge $100 of rent for every $100,000 of value of the property. This is a naive assessment and thinking in this way could prevent you from setting the right price.
It is important to stay on top of market trends. For example, if there is a shortage of rental properties available in your area, you will be able to charge higher rent. If there are more rental properties than interested tenants, then you will have to drop your price in order to stay competitive.
Supply and demand are always changing, so you should be reviewing your strategy frequently. An accredited property manager will be able to tell you the right price to charge and stay on top of shifting trends.
Amenities such as shops, schools, transport and other things like cafes, bars, and restaurants will also impact the price you can charge. The closer your property is to these amenities, the more rent you can ask for.
Also consider the condition of your property. Can you do some light renovations to boost it’s value? If it’s in need of some serious renovation, you cannot expect to charge a premium. Location affects the price, but so does the type of property and its condition.
When comparing rent between properties in your suburb that are for lease, the formula for success is making sure you’re comparing apples with apples.
If you are leasing out an unrenovated family home, you will not be able to compare the rental cost to a renovated or new family home’s price point.
Finding the balance of how much to charge for rent is easier when you are checking out properties with similar characteristics like:
- Land size
- Number of bedrooms
- Number of bathrooms
- Age of home.
- Last time it was renovated.
- Proximity to major infrastructure or amenities.
How To Increase rent by 5% to 10% more? Which amenities are big rental price boosters?
- Proximity to a train station.
- Fresh renovation.
- Many car parks, large garage /shed or workshop.
- Granny flat.
- Adding tax deductible White goods.
Adding things like white good makes the landlord responsible for maintenance of the goods. The benefits outweigh the negatives, for instance:
- keeping your tenants for longer lease terms as it could be difficult to find a better property.
- Australian Government allows the cost of purchase and maintenance to offset your taxable income.
PROBLEMS TO AVOID
Pricing too high.
If your price is too high, and your property sits on the market for months while you look for the ‘right tenant’, you are just losing potential income that would be more than the few extra dollars you would get from an inflated price.
It is better to get your feet wet and get a tenant in quickly. You can always adjust the price over time. Adding things like a week of free-rent is also a good strategy to stand out in an over-supplied market.
Your Property Is Not Ready To Lease.
Ensure that your property is in good working order, tidy, and safe for your tenants. If you provide a good property for your tenants, they are more likely to look after it and stick around. Finding new tenants can be a hassle and lead to a loss of rental income.
No Interest In Your Property
Adjust rent. If you initially have no interest in your property, then you may need to consider lowering your rental price.
But if the price of your property increases over time, and the demand for rental properties in your area increases, you can justifiably raise your prices to match market conditions.
Charge Rent According to Your Home’s Value.
There is a school of thought that teaches rent should reflect the property value. For instance:
If your home is worth $X00,000. it’s best to charge rent that’s close to 1% of your home’s value.
This method doesn’t take into account important market factors like supply vs demand.
This theory could work if your property was unique and there was high demand for your type of property.
Online Rent Calculators:
Online companies can combine live rental data with a post code to produce an estimated rent.
What the estimate misses is the interior/exterior detail of a property that determines the accuracy of weekly rent. In many rental markets, an error of $15 advertised rent could be the difference in leasing a property and having a vacant one.
Top 10 Tips on Setting Rent at the right price
- Look at the market. Knowing the median rental price for the area of your property is the first step and gives you a ballpark figure.
- You should also look at population statistics and the demand for rental properties so you can gauge what the market is likely to look like in the future.
- Your property. The type of property, number of bedrooms, bathrooms, parking spaces and whether it is new or in need of renovation are all factors which will affect the price you can charge.
- Compare similar properties & compare rents. This will give you a good idea of the price that tenants are willing to pay for your property.
- You shouldn’t base your rent on just your expenses, but knowing what all your expenses are will give you an indication whether you have a sound investment strategy.
- Professional help. You should seek the help of a property professional who will do the research and tell you what a fair price is. They can also help you balance your expenses and income so that your investment makes sense, and that you are actually making money. It is integral to find a property manager who has experience and local knowledge of your suburb.
If you take all these things into consideration, you are much more likely to maximise your rental income and be successful in your investing journey.
For the most accurate appraisal on a rental property, a qualified property manager is the best person to speak to.