Before you decide to purchase an investment property, you need to know what you can possibly charge for rent. If the numbers don’t allow you to be profitable, you shouldn’t purchase the property. But how can you know what you can charge for rent before buying?
One option is to use a rent estimate calculator to help you figure out the potential rent for a given property and explore prices of other rentals in the area. But how exactly are these rent estimates calculated?
Variables to Consider When Calculating Rent
These are some of the most important variables that will influence the amount of rent you can charge:
1. Consumer demand. Our economic system functions in accordance with the laws of supply and demand. When supply is high and demand is low, prices tend to shrink; there are few people interested in the product and lots of competitors trying to provide it. When supply is low and demand is high, prices tend to rise; there are many eager bidders and few sellers to serve them. Accordingly, in neighborhoods with low supply, prices tend to be higher. Rent is lower in areas with lots of vacancies and opportunities for renters.
2. Crime rates. The lower the crime rate of a given area, the more attractive it’s going to be, and the more people are going to want to live there. You can’t influence this variable directly, but you can choose to invest in neighborhoods with low and/or declining crime rates. Also, pay attention to the rate of violent crime vs. nonviolent crime; violent crime is much more serious and will likely have a sizable impact on rent prices.
3. School accessibility. Similarly, people often judge the overall quality of a neighborhood based on the quality of its school district. If the school is good, it’s going to attract more thoughtful, responsible parents and more young families to the area; it’s also going to produce a more educated and more responsible local population. The better the local education system, the higher the rent (generally speaking).
4. Property age. You’ll also need to factor in the age of the property. For some people, an older house is charming and unique – but it always comes with downsides. Older homes with older interior features tend to be less reliable, poorly insulated, and in the eyes of many, uglier. A newer house, or one with modern renovations, will allow you to charge more in rent.
5. Number of bedrooms. One of the best-known variables influencing the price of rent is the number of bedrooms associated with the property. A studio apartment will be less expensive than a 2-bedroom, which will be less expensive than a 3-bedroom, and so on. More bedrooms can accommodate more people – and provide more space.
6. Number of bathrooms. Similarly, you can justify charging more rent if there are additional bathrooms available. A house with 2 or more bathrooms is always going to cost more than a comparable house with only 1.
7. Total square footage. Of course, you’ll also need to think about the total square footage. In fact, many rent estimators use this as one of their most important variables; if you’re ballparking rent for a property, you can look at the typical price per square foot for a property in the area.
8. Lawn and curb appeal. Don’t underestimate the impact that curb appeal can have on rent. If the exterior of your property is more welcoming and more beautiful, it’s going to attract more tenants who are willing to pay more. A well-kept lawn and a fresh coat of paint on the outside may allow you to charge more in rent.
9. Extra amenities. The more your property has to offer, the more you can justify charging in rent. If you have onsite washers and dryers, ample parking, and other attractive bonuses, people are going to be willing to pay you more each month.
10. Other requirements. The fewer restrictions you have, the more you can charge for rent as well. For example, if you allow pets, you’ll attract a broader spectrum of demographics – and you’ll be able to justify charging more.
Boosting Rent Prices
Assuming your expenses remain consistent, it’s often in an investor’s best interest to try and increase the price they can charge for rent. Some of these variables can’t be changed by an individual; for example, despite your best efforts, you’re probably not going to improve the local school district or lower crime rates by yourself. But you do have control over which properties you add to your portfolio and the modifications you eventually make to those properties. Study these factors carefully and think critically before making a final investment decision.