How much rent should I charge? 5 Things to consider

The first step is to take an inventory of all your monthly expenses since, at a minimum, you will want to assure that you charge enough to cover those. Include the mortgage, any utilities that will not be covered by the tenant, insurance, the cost of listing your property, and taxes (both property tax and tax on rental income). 

You’ll also want to factor maintenance and repairs into your cash flow. Many of these will not be regular expenses, but plan for the occasional unexpected visit from a plumber or repairman. If a property management company helps oversee the rental unit, you will want to ascribe a portion of those fees to the tenant.

A common formula that provides a rough calculation of how much you should charge in rent is the 1 percent rule, which holds that you 1% of your underlying mortgage on the property is what you should charge for rent. 

For example, if the loan on a property is $300,000, the 1 percent rule would recommend that you charge $3,000 (or one percent of that amount) in rent. At $3,000 a month, it would take 100 months (a little over 8 years) for the total rental income to equal the mortgage. The 2 percent rule is similar but (as its name indicates) the goal is twice as ambitious. 

However, real estate investors should be advised that the rental market will not support the 2 percent—or even the 1 percent—rule. That ratio of purchase price to potential rental income may only be found in marginal neighborhoods where houses and apartments are relatively inexpensive to buy. 

Next, consider the unit that you will be renting out and evaluate it in the context of the local rental market. Rental markets are hyper-localized—that is, they vary from neighborhood to neighborhood and even street to street. They also vary by type of unit. The rental market for studio apartments will be different than the market for a single family home. 

Know that your prospective tenants will be comparing your property to similar rental listings, so you should do the same. Measure its square footage and consider all of its attractive—and not so attractive—features. Compare it to other rental listings in your neighborhood to get a sense of the going rate for comparable properties.

When you set a rental rate, you can’t assume that you’re property will generate that rent 100% of the time. When tenants move out, there’s usually a gap between their move out date and the move-in date of your next tenant. Research average occupancy rates on real estate listing websites—are rentals on the local market sitting vacant for long periods without finding tenants, or are they moving quickly? 

Pricing your property competitively can help minimize vacancy. Even if you may be able to find someone willing to pay a higher rent, a downside is that is often accompanied by higher turnover (if they move on once they realize there are better deals on the market). Sometimes keeping a good tenant at a lower rent—and a consistently occupied unit—works out better over the long run. The gains of a higher rent can be wiped out if it leads to frequent turnover and gaps between tenants.

It is, of course, important to be familiar with local regulations regarding rents. In large parts of the country, especially on the coasts, there are local and state-wide rent control laws that typically cap the amount of rent that can be charged of new tenants, as well as the amount that rent can be increased each year. (In many jurisdictions, rent control or rent stabilization boards determine rental guidelines and adjust them on a regular basis.) 

The specifics vary widely—sometimes rent control only applies to buildings with a minimum number of units or which were built prior to a certain date. Carefully research what, if any, rent control regulations apply to your property. 

The impact of rent control laws on your rental strategy will vary along with the specifics of local housing laws. In some jurisdictions, rent control laws cap the amount that rent can be increased; in others, there are no caps, but rents can only be increased at specific points in time (often no more than once per year). Oregon’s rent control law caps on rent increases are set statewide (at 7 percent plus the rate of inflation); in California, on the other hand, rent increases are set based on the cost of living in individual metro areas. 

Two rules of thumb, however, are broadly true. 

1. Rental units in areas with rent control laws turn over less frequently, as the longer a tenant keeps the lease, the more savings they enjoy over time thanks to capped annual rent increases. Therefore when setting an initial rent, be aware that you’ll have to live with your decision for some time. 

2. Rent control laws make it more difficult to evict tenants. While it is always important to vet tenants, in areas with rent control laws you will likely have an even longer relationship with them. 

In addition to state and local regulations, be aware of any limitations set by co-op or condo boards or homeowners associations (HOA). Boards and associations may cap the period that a property can be leased, have floors and/or ceilings on the amount of rent that can be charged, and require approval of tenants. 

Similar to rent control laws, how these entities should shape your approach to renting out a unit will, of course, depend on the specifics of those rules. If a board has a minimum time period for rentals (a common restriction to prevent their use as short-term rentals), leasing your home as a short term vacation rental is not an option. If boards require additional insurance for leased units, another common practice, it will be an additional expense to factor into your calculations. 

Bungalow offers tenant placement and property management services that keep your property fully occupied and well managed—helping you earn more rental income from your investment property. With Bungalow, homeowners earn up to 20% more rental income. Learn more about Bungalow.