People purchase investment properties with the intent to make money. A large part of being able to profit from a rental property is finding the balance between charging too much and charging too little.
With rental markets across the globe becoming more competitive than ever before, you need to make your rental property stand out. Its imperative that you find the right rental price that will attract desirable tenants. Pair this with an attractive, livable home, and you have a winning combination for passive income.
By researching your market, doing the math and consulting your network you can determine an optimal rental amount for your investment property.
Consider the following factors the next time you are trying to price your investment properties rental fee.
A great place to start research for your investment properties rental fee is the competition. Focus your efforts on rentals that are very much alike to your property. To get a deeper understanding of your local market asses the following:
Check out properties within the same area as your own, better yet asses the specific suburb that your investment is in. Attend house viewings, scan local brochures and rental websites.
Compare every property you view against your own. Determine what your place has that others don’t and what it is missing, this will help you gauge where you sit on the rental fee scale.
Rental fees can also vary from suburb to suburb, speak with the local real estate professionals in your area to determine your areas appeal.
You need to research properties that individually have the same amount of bedrooms and bathrooms as your own. The closer to your own home the better idea it will give you on what is an acceptable rental fee.
-New vs. Old
Future tenants as a whole are comfortable paying more for rental properties that are new builds. Old builds still hold value and desire for tenants, but new builds will attract tenants quickly as it is most peoples first choice. Compare what new builds are charging as opposed to old builds in your area.
Depending on your location the government may have control and influence on rental prices. Be sure to research thoroughly what rules and regulations are in place in your city.
Calculate and Understand Rental Yield
Investment property mag defines rental yield as the measure of how much money an income generating asset produces annually as a percentage of the value of that asset. The yields relevant to your investment property are gross and net.
Before you finalize your investment properties rental fee, you should do the math and see how much each price point would allow you to gain in profit.
This is the rental income return your investment makes before expenses vacancies etc. are considered. The gross yield percentage does not account for interest rates.
Net yield is the income return your investment property produces after expenses are taken out. (maintenance, insurance, vacancies, etc.) Often property professional will refer to net yield as “rate of return.”
Calculate gross Yield
To determine your gross rental yield, Multiply your weekly rent by 52 weeks and then divide that number by the property value, then times that number by 100.
Say our investment property holds a value of $500,000 with a monthly rental fee of $2500 (weekly rental fee of $625).
Calculate Net Yield
To calculate the net yield, take your calculated annual property income, subtract your yearly expenses. Then divide annual expenses by the property value. Lastly multiple this number by 100.
Again, say your investment property holds a value of $500,000
with a monthly rental fee of $2500 (weekly rental fee of $625).
Property Expenses can include:
- Building Inspection costs
- Vacancy costs
- Repair work and maintenance
- Property management fees
Amenities Add Value
When determining your investment properties rental fee, you need to account for amenities. In some cases, amenities make or break a home and can be the sole purpose a potential tenant is interested in your property.
Examples of Amenities that could alter the rental price:
- Swimming Pool
- Outdoor area (Barbeque, seating area, etc.)
- Area (Local restaurants, school zone, public transport, Gated Community, etc.)
- Air conditioner/Heating unit
- Home Exterior (Brick, Log, Stone, Concrete, etc.)
Your Investment Properties Rental Fee Matters
It’s called an investment for a reason. You want to make money off it right? Regardless of if you’re going to grow to a multi-property portfolio or stick to one stream of passive income, you need to research to succeed.
To be able to consider your investment worthwhile, at the very minimum the correct rental fee should cover all of your properties expenses. From your mortgage repayments to maintenance fees, everything needs to be covered by the rental price.
It’s typical that property investors do not see a profit until they sell their asset, or have owned the property for an extended period. Either way, if the unit isn’t paying itself off, allowing you to have tax benefits or putting money in your account you have set the rental fee wrong, or over-invested in the property.
The market never stays the same, and your investment properties rental fee needs to reflect that. You should never set the price once and let it be.
You have to be monitoring the market closely to see when to charge more or less. However, as a general rule, when there is a higher demand for your investment, you can charge a higher amount. When there is less demand, you will have to lower the rent to attract potential tenants.