How to Set Rent for Optimal ROI

By Alex

Author: Alex Delaney

Setting rent can be tricky business. You want to get a good return on your investment, but you won’t be successful if you set a certain rental amount without considering other factors. To get the best return on your investment there are four things you should strive for:

  1. Make sure you purchase investment property that is well-maintained and will not require outrageous repair costs;
  2.  Set your rent to the appropriate level that will garner the highest monthly income;
  3. Carefully screen your tenant to decrease the likelihood of eviction filings; and
  4. Provide a comfortable home that your renter will stay in for years, allowing you to avoid yearly turnover costs.

Setting the Rent Amount

To set the rent amount, start with the ROI rule of thumb. This is a figure that will likely get adjusted based on the issues we will look at in a moment. The current rule of thumb is to set your rent between 0.8% and 1.1% of the property’s value. For the purposes of this blog, our sample property is valued at $175,000, so according to the current rule of thumb, it should command a rent range of $1400 to $1,925. You can check the estimated value at Zillow, by entering the property address.

However, by checking other rental properties in the area of our sample property, we find comparable properties (similar square footage, number of bedrooms and number of bathrooms) set at $1100, $1335 and $1425 respectively. These rental amounts are lower than our sample property, putting our property at, or above, the high end of a range. To justify that rental level, we must look at other factors.

Time of Year

If your property has become available in Summer, great! You can steer to the top of your rental range (keeping in mind that other factors must be considered). Summer is a great time to rent as families can relocate without interrupting their children’s school year. Conversely, if your property is vacant in the winter months, and you can’t wait for the Spring season, you will want to beat the competition by lowering the rental amount. A vacant property is a property without income and you don’t want it to sit empty for a few hundred dollars thereby losing a month or more of income and risking damage through break-ins. As this blog is being written in January, it can be assumed that the comparable properties are set low to stand out in a tight market.

What Type of Neighborhood

See our prior blog posted on January 2nd, “Smart Value Increases for your Rental Property” to understand the differences in  A level, B level, or C level properties. Determine the level of your property and if the neighborhood also fits in that level. This will factor highly if your comparable properties fall under a different level.

How does the property compare to other local rentals?

What do you have that they don’t have? Washer and Dryer in the unit? Fireplace, or large deck? How is your curb appeal? You want to stay competitive, but if you have great features, take advantage of them in marketing, this will allow you to command a higher price.

What amenities are available close by?

 If your property is near a safe park, or great shopping and restaurants, these issues will appeal to a wide range of tenants. Is there a dog park nearby, or easy access to highways? Make sure to note these issues in your marketing description and your evaluation of rental price. Check out our October 9, 2018 blog: “Millennials Dominating the Rental Market” to get a sense of what the large Millennial market is looking for in rentals.

Issues that can raise or lower the rental amount:

Area safety

A great or poor school system

An attractive, well-maintained neighborhood

A house next door with trash or multiple inoperable vehicles

The high-end home in our comparables is slightly smaller than our sample home. It is in a similar neighborhood with large yards, and is situated in the same school system. However, its’ neighborhood also has a lot of cars parked on the road, and its’ neighboring house is very messy, with trash strewn around the front and side yards, impacting the curb appeal of this comparison. Our sample home is located in a cul de sac, a plus for families with children. The neighborhood is neat and it has outstanding curb appeal. The home has an updated kitchen and will show well. Yet, because of the time of year, we will need to list it at the lower end of its’ ROI range to avoid a lingering vacancy.

Our decision on this rental, based on the above noted issues, is to take a risk and rent at $1,550. If it were the peak rental season, we would place it at $1,750 to $1,850. But, due to the current seasonal slowdown, we do not want the property to sit vacant. We will keep an eye on traffic and be prepared to lower to $1,475 within a week if it does not show high interest.