Evaluating Rental Rates and Knowing When to Raise the Rent
As a rental real estate investor, knowing how to evaluate the local rental market and set accurate rental rates is essential to long-term profitability. In fact, the rental rate should be one of the important calculations you make before you even buy an investment property. It’s also important to re-evaluate your rental rate on a regular basis to be sure that it is still in line with the local rental market. But evaluating rental rates and increasing them both require a degree of knowledge and skill. Otherwise, you could end up with vacancies, unhappy tenants, and lost rental income. With so much at stake, it’s worth spending some time to learn how to calculate accurate rental rates and handle rent increases like a pro. Delegating these responsibilities to a professional property management service like Real Property Management can take the stress out of evaluating the market and adjusting your rental rates, helping ensure you are pricing your rentals accurately and avoiding lost rental income.
Evaluating Your Rental Rates
One thing you can do to evaluate your rental rates is complete a rental market analysis. A rental market analysis is the process of calculating the average rent price per square foot for rentals near yours based on comparable properties for rent.
The first step is to locate three to five comparable rentals in the neighborhood. A comparable property is one that will be similar to yours in size, age, condition, number of bedrooms and bathrooms, and so on. You can find properties for rent by doing online searches (on Zillow, for example) or by looking through local rental listings.
Once you have your comparable properties, the next step is to calculate a rental price per square foot for each one of them. To do so, simply divide the rental price by the property’s habitable square footage. Then, average all of them together to get an average price per square foot. For example, if you had three comparable properties, you’d add together each rental price per square foot, then divide by three. You can now estimate how much you should charge in rent by multiplying the square footage of your rental property by the average price per square foot.
However, your rental rate evaluation isn’t quite finished until you’ve adjusted your rental rate estimate for amenities. There are two potential types of amenities: community amenities, and then those that are specific to the rental property. For example, community amenities could include a nearby park, access to public transit, or proximity to a downtown area. Amenities that are more specific to the property could include things like tech upgrades, a swimming pool, or included services (like landscape maintenance, for example). Depending on which amenities apply to your rental property, you will want to adjust your rental rate up or down accordingly.
Regular Evaluations = Maximum Rental Income
While knowing how to accurately assess the rental market and calculate a rental rate is a good start, it is really only the beginning of an ongoing process. To ensure that your rental remains profitable and is competitively priced, it’s important to evaluate your rental rates on a regular basis. Most experts recommend doing so at least once a year, but if your rental is located in a particularly hot market, you may want to re-evaluate your rental rates more often than that.
Rental Rate Increases
Once you have determined a fair rental rate, the next challenge is to determine if, when, and how much to increase it. Rental rates are rising in markets around the country, and if yours aren’t being adjusted regularly, you may be losing out on rental income. Or, perhaps even worse, your expenses may increase faster than your rental income, which could create serious cash flow problems.
If you are regularly assessing your rental property, you will have good data on rental rate increases in your local market. You can then use that data to determine when the right time has come to increase your rental rate. For example, if the average rental rate per square foot has increased significantly since your last evaluation (2% or more), or if your property expenses (including property taxes, insurance, or other fees) have increased, those are both good reasons to raise your rental rate.
When to Raise the Rent
One of the best times to increase a rental rate is when your tenant’s lease is up for renewal. In fact, depending on what type of lease you have, you may not be able to raise the rent until the current lease term ends. Keep in mind that you should always know and follow state and local regulations that govern rental rate increases, as well as the terms of your own lease. Trying to use a rental rate increase to force an unwanted tenant to move, without giving proper advance notice, or in violation of your lease or local regulations can all carry unfortunate (and expensive) consequences.
Finally, if you would like to keep your current tenant despite increasing your rental rates (and if they are a good tenant, you should), it’s important to handle the entire process with skill and professionalism. For example, give your tenant plenty of notice about the rental rate increase. For example, many states require at least 30 days’ written notice, but you don’t have to wait until exactly 30 days in advance. In fact, most tenants will need more than 30 days to assess their finances and make a decision about whether to stay or not. Giving them more time than is required by law can help bolster good tenant relations. It’s also important to communicate to your tenant why you are raising the rent, and how it is still competitive for the area. If your tenant understands that rents (and expenses, in most cases) are going up everywhere, they may be more accepting of your impending rent increase.
As you evaluate your rental rates and handle rent increases, wouldn’t it be nice to have advice from a local rental market expert? Calculating and raising rents can be time-consuming for any rental property investor, which is why the professionals at your local Real Property Management office are ready to help. Contact us today!
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