How to set the perfect rent for your residential rental property?
As landlords or property owners the most challenging part while renting out their property is to decide the right rent amount.
When the NRI landlords or other property owners decide to rent out property, they aim to:
- Cover property mortgage, or
- Cover taxes. Or
- Cover maintenance costs, or
- Save money for their retirement, or
- To maintain positive cash flow.
Basically, the aim is to make some profit by renting your property to tenants.
But again, the problem hinges on the question: what is the perfect rent for a residential rental property for landlords.
If the landlords set the rental price too low then they lose out on profit. And if they set the price too high then there are very good chances that the rental property remains vacant for a very long time.
In fact, if the rental price is high then even if the property gets occupied but as soon as the tenants find a similar place at cheaper price, they may vacate it. Resulting in revenue loss.
Landlords are mostly drawn towards increasing the rent price in order to capitalize on the cash flow, but that approach can backfire. A high rent amount could push away prospective tenants. Especially if it doesn’t match with the neighbourhood leading to the disappointing vacancies.
If you lose on tenants for even a month, your profits will drop.
Vacancy is the top reason landlords lose money on rentals, so make sure you set the rent of your property competitively.
Factors that influence rental pricing
- Joint-family or single family or single person
- Number of rooms
- Area of the property
- Location and proximity to schools, malls etc
- Duration of lease
- Pet friendly
- Laundry facility
- Power backup
- Lease clauses
- Parking space
Here are a few tips to nail the rental price equation and gain maximum profits.
The essential thumb rule of setting the rental rate is:
Rental Price = 2.5-3.5% of the market value of property
For example, if a property is valued at Rs. 40 lakhs, then it’s rental price will range between Rs 10,000 to Rs 14,000 per month.
Having said that, the estimation may vary depending on the demand and supply equation. If a property is in high demand then the rental price can go up to 3.5%. But if the demand of the property is low then the rental rate stays at 2.5% of the total property value.
Study the competition
When you are trying to set the right rental price for your property then the first thing should be to study the comparable. This includes considering the market rate for similar properties in the same area as yours. The price may vary depending on:
- Number of Rooms – higher the number higher the rent
- Number of members as prospect tenants – rental price for single families will usually be higher than for joint families
- Age of the property – rental price can go up if the construction of your property is new.
How to study the competition market
There are various ways to study how the property rentals vary in your competition market, some of them are:
- Newspaper and Online Ads – Websites like magicbricks.com, 99acres.com etc can give you insights about the property for rent in your area. Likewise, local newspapers also run ads for property on rent. All you have to do is keep an eye on the flats that get rented fast, those that decrease their prices and those that have been listed for long.
- Ask the landlord – You can even ask the landlords directly for the rental details and compare them with yours.
- Get a property management company’s opinion – nothing beats the opinion of professional property managers. They will guide and even manage the complete rental pricing, tenant acquisition and rent management process.
Adjust the rental price as per the amenities
The landlords should not set a standard price for the properties. The price should vary depending on the amenities and how desirable the property is.
Set the rent depending on:
An apartment with an attractive view, updated appliances, well maintained floor and ceiling, bigger space, extra storage facility, balcony and windows gains more attention from prospect tenant.
Apart from these points if your property is in a multi-storey building then higher the floor, higher the rent.
The only exception to this is if the building has 4-5 floors without lift, then as you go high the landlord will have to decrease the rent.
Market value of the property
Market value determines the current value of a property with respect to the core factors. There are many elements that may affect your property’s market value; like an infrastructural development.
For example, the development of a metro link, a flyover, or a school can positively increase the market value of your property. But, the development of a dumping ground near your property can decrease its market worth.
Thus, it is crucial to identify the current market value of your property to correctly set the rent. If you face some difficulties in quoting the correct property worth, then take help from property maintenance services provider in your area to know the exact cost of your property.
Existing rental rate
Real estate advisors believe that it is important for the landlords to consider the rental price charged by other landlords in your area. And make sure that the rent you charge for your property is in sync with the existing rental price for similar property in your area.
Too much difference between the existing rental price in your area and the rental you ‘demand” can dissuade the prospect tenants and move them to other low-priced options.
Understand the regular cost of mortgage, taxes, repair and maintenance which you have to pay while the property is vacant and appropriately decide upon the rental rate.
Change the rent as per the evaluations
A very crucial understanding for the landlords is that they can/should change the rent amount as per the assessments attached to the property.
Ideally the homeowners must re-evaluate the rental price after every year or at every lease expiration to gain maximum ROI. As landlords your objective should be to increase the rental price as much as possible over time without losing the tenant as vacancy can cost you time and money.
“Lower the rental prices if you get few calls/visits on advertised property. On the contrary, increase the rental prices if you receive many calls/visits on your property.”