Just like numerous other economic factors, rental rates fluctuate over time. Theoretically, they can go up and down. Practically, they only go up over time. That means if you don’t ever change your property’s rent rate, you’re eventually going to be undercutting yourself and charging a number that’s well below the going market rate.
If you’re in a situation where you’re charging less than the market rate, you have options. However, if you want to increase the rate and bring it up to the standard in your area, make sure you’re smart about how you do it.
Otherwise, your decision could lead to some unintended consequences.
If you want a very quick (but often inaccurate) estimate of how much you should be charging for rent, you can run the One Percent Rule in your head. This method says that the monthly rent should be equal to roughly one percent of the property’s current value. On a $150,000 property, that comes out to roughly $1,500 in rent. However, don’t take this “rule” as gospel truth. For example, just because you have a rental property that’s worth $400,000, doesn’t mean you can charge $4,000 (in most markets, at least).
Thankfully, there are better ways to get a feel for the going rate in your area. Here are a few:
These are just a few of the methods you can use. Quite honestly, the more research you do, the better. By grabbing values from different places, you can sort of average them all out and get a pretty good feel for how much you can charge.
If you find out that you’re currently undercharging on rent with your current tenants, you have a couple of options:
Legally, you probably can’t bump the rate up 25 percent on an existing tenant. More than likely, you’d have to go to $1,300 first. That begs the question, is an extra $100 per month worth rocking the boat and potentially losing an excellent tenant? That’s something you’ll have to decide.
At the end of the day, you have to do what’s best for you and your investment. However, there are some “rules of thumb” that you’ll want to keep in mind as you decide how much to charge for rent.
First off, you need to know the minimum rate you can charge – your break-even point, if you will. This is the bottom line number that covers your operating expenses, mortgage, etc. Charging anything below this will cause you to lose money.
Secondly, you need to know the maximum fair market rent rate. In other words, what’s the upper end of the current market? This is the number that will allow you to generate the highest cash flow and best profit margins.
Generally speaking, you want to be somewhere in between these numbers. You don’t want to charge the minimum (because you won’t make anything). And you probably don’t want to charge the maximum either (as it will suppress demand and make it difficult to find a good tenant). The answer is somewhere in between.
If you decide to increase the rent in order to bring it into alignment with current market rates, make sure you have a plan. Here are some tips for raising rates without losing your tenants:
At Green Residential, we do more than just manage Houston rental properties. We work closely with real estate investors and landlords to ensure they’re maximizing cash flow and protecting their properties in less time and with less stress.
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