How to Determine Fair Market Rent
Its important to know how much you can rent your property out so we discuss different factors that impact this price. We go over what is market rent and how to find these numbers and statistics to determine it.
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Hi, thanks for joining me for today’s REI 360 training.
Today, we’re going to talk about how to determine for your property as far as a rental rate. If you’ve got a rental property, how do you determine if you can charge five-thousand a month or five dollars a month? It really comes down to a couple simple factors, but the first of which is what we call ‘market rent.’
Market rent is the idea that there’s a certain amount of money that people in the marketplace are going to pay for a given property. Not all three bedrooms work the same. Not all five-bedroom houses in the same city are worth the same as far as rent goes. Different neighborhoods, even different houses are going to be able to demand more or less rent based on what the market says. The idea being that the more demand there is for a property, the more valuable to property is.
One factor that I want to push up front is that if you’re advertising a rental property, and you are not getting calls for that property, there’s one of two reasons: number one, you either did a really poor job of fixing it up, and it is a dump, and people can see that with the pictures. You’ve got poor pictures, it’s going to present poorly. Or number two, it’s priced too high. More times than not, the property is priced too high. I’ve gotten calls in really crappy properties if the properties were priced right, and that’s really important.
You don’t want to take too little for a property, either. If you price it too high, you get no phone calls. You price it too low, you get a ton of phone calls, you run it really quickly, but man, you’re leaving money on the table. Nobody wants to do that.
So, let’s talk about how do we price out. What are some factors that are going to impact that value of a property?
Now, I’ve broken these factors down into two different areas. First is going to be structural factors and the second is conditional.
Structural factors are very similar to the types of things that you’re traditionally going to be looking at when you’re buying a house or you’re evaluating an investment property. These are things that without a significant financial investment, you’re not going to be able to change. Some of them, even with a significant financial investment, you’re probably not going to be able to change.
So, first of all is going to be the size. Unless you put in an addition on the back of the house or another story up on the top, you’re not going to be able to change the size of the property. Often times, people are looking for a little bit larger of a property. They’re looking for a larger property, they’re willing to pay more for a little bit more space. I’ll put contributing factor.
The second is going to be the layout. For one reason for another, there’s some people that love ranchers. There’s others that love row homes, or town houses, or colonials, or cape cods, or whatever. In different regions of the country, different types of properties are more attractive, they’re more in demand, and because of that, they’re going to rent or sell for more money, and so this is another contributing factor. The number of bedrooms and bathrooms in the property is certainly going to have an impact. This kind of goes hand in hand with the size. Traditionally, the three bedroom/one bathroom house is the most attractive in the marketplace; these are our bread and butter properties, and that’s because the average family has 2.3 children. That leaves one bedroom for parents, one bedroom for one kid, and one bedroom for the other kid. Everybody shares a bathroom, and it’s great for a rental.
More bedrooms can often times be more money. Two bedrooms is going to limit the amount of people that are willing to rent a two-bedroom house, or a two-bedroom/one-bedroom apartment, whatever. But depending on the size, it’s going to be either more or less people that are interested in renting that type of property. That’s going to have an impact on how much you can charge rent.
The condition on the property. If the property is in good condition, if you’ve kept it up, if it’s brand new, you certainly are going to be able to demand more for an updated rehabbed property than you would for the same house right down the street that hasn’t been remodeled in thirty years. People are going to be more attracted to that remodeled property than they will on the dated house down the road. That’s something to keep in mind.
Again, this is something that might be a conditional factor. It just really depends on how much work we’re talking about. I’m trying to look at without significant financial investment here. These things can’t be changed. The location – look, what’s real estate? Location, location, location. That’s a huge factor. In my city where I invest, a few blocks can mean the difference between an extra thousand dollars a month for a property on a rental basis. So, that’s going to be a huge impact.
You’ve got to be sensitive to these things when you’re advertising a property. You also have to be realistic about them. If you’re targeting student rentals, and your house is too far away from the university for students to commute easily, you’re not going to be able to get top rents like you would have if the house was right next door to the college, so it’s something to keep in mind.
These last three are conditional factors. These are things that, without a major investment, you can manipulate, you can change, you can move around to further attract more and better rental candidates who will pay more money, pay it more consistently.
So, amenities. What am I talking about? Amenities are things that you want to point out in the house; it might be a new kitchen. That’s a big financial investment, but these are things that you also want to take a look at when you’re purchasing a property. Is there a backyard? Is there a deck on the house? Could you invest a few dollars to make a little patio area in the back of the property that would be attractive? You know, a nice place to put a grill, or put a little table to sit out back, and enjoy the summer months? Does the place have hardwood floors throughout the property? For a thousand or two-thousand dollars, you can refinish those floors, and it can have a heck of an impact on the attractiveness of that property.
These are the types of things – it might be carpeting, it might be a ceiling fan – these are the types of things that you can highlight in your advertising, but also the things that are attractive to a tenant. They’re things that they can emotionally attach to that property that will differentiate your property from someone else’s, and maybe loosen some purse strings.
The utilities. In different areas of the country, there are different traditions of what’s expected, what the landlord will provide, or what the tenant will provide. In larger apartment complexes, often times, most of the utilities. and the heating and air conditioning, and lighting and obviously things like that are all tied to the electrical bill, and then the complex takes care of the water bill. So, they’ll advertise ‘water included,’ or ‘You only pay your electric bill,’ or something like that. That’s what I’m talking about when I’m talking about utilities. With my rental properties, I like to have each utility metered per unit so that I can say on a three-unit building I’ve got three heaters, three hot water heaters, three electric boxes. Unfortunately, in my area, there’s one water meter through the building, but I put a flat rate on all of my apartments for a monthly flat rate for water, as well, so that each person in the building is responsible for their own utilities.
But if you want to attract more people, and you want to charge a little bit more money, you know what? All utilities are included. That’s an option. It’s a factor that’s going to impact how much you’re going to charge. One reason I like to have everything metered out is because then I can advertise the property a little bit less expensively. If i know that they’re responsible for the gas and electric bill, and I’m going to charge them a monthly water fee, what I can do is this: I advertise the property for six-hundred and twenty-five dollars. A similar competitor’s apartment is running for six-hundred fifty dollars, so of course they’re going to call me. But as part of the lease, I’m also going to include a fifty-dollar per month water charge so, in essence, I’m making six-hundred and seventy-five dollars a month for a similar apartment that would rent for six-hundred and fifty. It just helps with the marketing, it attracts more people, allows me to get more money, and allows me to get more people through the door.
The last thing on this conditional factors list is timing. Timing can be a really, really big factor. When I first got into the business, I ran into this investor with about eighty rental properties, and he swore up and down that because of the way he manages properties, he was able to limit the number of these that any of his units were vacant to less than ten. And not ten per unit, but ten for his entire portfolio for the prior year. And looking back, I’m guessing he’s probably full of it, but maybe not, because what he told me is that he was able to time things just right. If he was forced to have someone move into a property in the wintertime or in a bad time of year, he would not write a one-year lease. He would write the lease to end in the spring or in the early fall so that he could have his units available during times when the most people are looking for rental properties. And it was really smart, and it really made a lot of sense to me.
So, this is something that you’ve got to think about. When you’re buying a property, or you’re renovating, or you’re putting something on the market, you’ve got to look around and say, “Okay, is this a time when most people are going to be tied up and not really want to move?” If there’s going to be a foot of snow on the ground, it’s really going to be a detriment. That’s why winter is not such a great time to rent properties. Also, from the beginning of December to about mid-January, it’s really an awful time. It’s not just cold, at least in my region, but the holidays are there. Nobody wants to be tacking on boxes when they’re thinking about putting up their Christmas tree, or putting up lights outside, or just enjoying their family for the holidays. That’s something to keep in kind.
Some other bad times during the year are at the beginning and the end of the summer because, traditionally, that’s the beginning of the school year. If kids are involved, you know, who wants to pull their kids out of school and change schools halfway through the year, so those are two times when you can really capitalize at the end of the year, these are people that if they’re going to be moving, now’s the time to have a property available. And likewise, before the school year, if they’re going to be moving, you want to have properties available at that time.
Right there in the heart of the summer – July’s a really tough month to rent properties. A lot of people are on vacation, a lot of things going on. That’s something to keep in mind.
So, timing is a big deal. I’m going to put a big asterisk here, and more than any other part of the rental business, when you put to students, timing is a huge deal. In my market, the beginning of November and the end of January, all of the student housing is rented for the entire next year, and that’s from August to August. So, if you miss that window, you can have a property sitting for an entire year vacant. It’s a terrible situation, and it’s something that you’ve got to keep in mind. If you miss that window, you’d better be willing to drop price and anticipate taking a little bit less of a lower rental rate in exchange for just getting the place filled until next year when you can rent to students again.
So, these are some factors that are going to impact your price. Now that we’ve kind of had an evaluation of property, number of bedrooms and bathrooms, the size, the layout, the condition, the location, amenities, utilities, timing – all of that kind of stuff – we’ve got a handle on our property, our unit.
Now, it’s time to go out and start looking at the numbers. But where do we start? That’s a good question. In a lot of my other trainings, I talk about defining your target market, your farm area. Well, this is a time when that’s going to come into play. You will already know your market. Wherever you’re investing, you’ve got to know that neighborhood and know it really well.
But you know what? There are some times where if you’ve got three or four rental properties or maybe five or six in a certain area, but you do such a great job that your tenants end up staying for five or six years, of course the rental rate is going to change. You’re going to have to get reacclimated to what that property is worth in the current market.
So, one way you can do that is to farm your target market. Get in the car, start driving around, look for ‘for rent’ signs. When you see them, call them, talk to the landlord – “Hey, I’m interested in renting this property. How many bedrooms and bathrooms? How big is the place? What kind of condition? How long has it been empty?”
All of this kind of stuff get information. Do that with every place that you can find within your target market so that now you’re looking at your competition – “I’ve got hardwood floors, this guy has hardwood floors. I have three bedrooms, they have three bedrooms. They’re right down the street from each other, pretty comparable properties, and he’s asking nine-hundred a month. Am I realistic at eleven-hundred a month?”
Who knows. It’s something you’ve got to think about. This is my jumping off point.
Next, I can look on Craigslist. I can see what is selling on Craigslist. Within the last year, they added a search function to their site. This is really fantastic. It’s a map search where you could actually look at a geographic location, see all the properties that are on Craigslist for rent in a certain area, how much they rent for, how much they’re asking, pictures, amenities, all that kind of stuff. It’s really good stuff.
So, I would look on Craigslist. If you are a real estate agent or you typically work with a real estate agent, the MLS may be an option for you. Typically, MLS is a good option for higher priced properties at a thousand or fifteen-hundred plus. On the lower end, most of the time these are private rentals because, a lot of times, agents won’t want the listing for an eight-hundred dollar rental because they’re getting a few hundred dollars for throwing people in their car and driving them all over creation for a hundred/two-hundred dollars for a lease. So, it’s something to keep in mind.
But if are in the higher end, it’s a good place to look.
Real estate investors have other friends who are real estate investors, and the landlords have friends that are landlords, you know? This is something that you need to know about. Call up a friend, “Hey, what do you think this place could rent for? What are you seeing in the market? Are rent prices going up? Are they going down? What’s going down?”
If you don’t know anybody with rental properties in your specific area, ask around. Talk to different people, and you’ll be able to get some feedback. You also hear a lot of people flapping their gums and complaining about how terrible it is to be a landlord, and you just smile, and sit back, and say, “Yeah, I’m going to loop somebody in for the next six years, and they’re going to pay my mortgage.”
The other nice outlet here is online racehorses. I listed three here – there’s probably a thousand different sites that can give you an idea of what things are running for. Each one of these has their attributes, their good parts, and bad parts. However, these are not human beings. What these sites are doing is they’re taking a conglomeration of information and spitting out one or two numbers to you. That doesn’t necessarily mean that that’s what you can rent for. Trulia and Zillow are fine – they have a lot of data, but they also miss a lot of data. If you are comfortable with them, you like what they’re telling you, and it’s realistic for your market, go for it.
I prefer rentometer.com. Rentometer.com is nice because it pools information from a lot of different sources. It will come and give what looks like a thermometer – a big circle thermometer – and you’ve got an arrow that goes up and basically you in there, you give them the address, what you’re going to propose to charge rent, how many bedrooms and bathrooms, and it will shoot back where you propose a list, comparison to the rest of the market. It gives the top twenty percent, the lower twenty percent, and then the eight percent in-between. I typically find that the median price range that they put in there is pretty darn realistic. Sometimes it’s even a little bit low. So, it’s a good place to bounce some numbers off, but it’s not the only place to go.
My cheat, my little rent hack, is a three-step process. What I do is I take the address and pump it into rentometer.com, it kicks back, and then I take a look at the map that’s there, and I’ll see, “Okay, these are renting for such and such.” The thing with rentometer, also, is it gives you a map, and it will give you the number of bedrooms and bathrooms. On the map, it will be little bullet points for each property they’ve actually rented. These use actual rentals – not listings – to determine the amounts. You click on the button, and it says ‘bedrooms, bathrooms, rental amount, date that it rented’ for each one of them. So, I’ll take a look at that information.
With that in mind, I’m going to go to Craigslist. On Craigslist, I’m going to make three ads. Three ads that I’m going to post are going to be based on the data that I’m pulling from Craigslist and from rentometer. If rentometer is telling me the median rental price is seven-fifty, what I’m probably going to do is I’m going to take the top twenty-percent – it’s, like, nine-hundred to eleven-hundred – and I’m going to search with that price range in mind. I’m looking for every listing between nine and eleven-hundred. If I go in there, and there’s two or three properties, I’m just going to pass, I’m not interested. I’m going to cut that top twenty-percent off. Then, I’m going to search with my middle range, and you’re probably asking yourself, “What are you talking about?” What I’m talking about is when you go to rentometer, it will give you the top twenty-percent, the median – sixty-percent and then the lower twenty-percent. I’m going to be searching Craigslist with those three different price points to see what my competition looks like.
Then, I evaluate, “Okay, these properties in the middle are not nearly as nice as my property. These one’s on the high end are okay, they’re a little bit nicer than my property, but we’re somewhere in there… I figure that I’ll probably rent it for the higher end of that median price range.”
So, then what I’m going to do is I’m going to take that data and I’m going to split test. For just a few dollars, you can get a vanity number – you can Google this online – or for a local number. Get three of them, have all four under your cellphone, and usually you can put some kind of message so that when the phone rings – like, I have one for an emergency line for my company if somebody has an emergency, they call the emergency line, and my phone rings ‘911.’ It’s the same sort of thing with these vanity numbers where maybe you have a ‘001,’ ‘002,’ and ‘003,’ and you have three ads with three different phone numbers for the same property at three different price points. This is a way for you to evaluate how much you can get for rent, what the right price point is for your property at this time.
If the high end rings just as much as the middle, get rid of the lower two ads, and just advertise with the high end. If the median rings like crazy, and the high end gets nothing, you know that your price point is somewhere in that median price range.
So, the idea is that we want to get feedback, and feedback to see how our properties stack up with respect to the rest of the competition. We want to get the most that we can for our property without limiting ourselves to the types of people that are going to be applying for the property.
I hope that was a pretty good explanation of how to determine what your property will rent for, and that’s it for today. I appreciate you joining me, and I wish you the best of luck in your real estate investing until we see each other again.