5 Factors To Consider When Determining Rent For An Investment Property

Considering what to rent a property for is one of the single most important decisions you can make regarding your real estate investment. Rent is going to establish the property’s rate of return, which is the main objective of real estate investing. Many investors often use the “1% Rule” – which is 1% of the value of the property – as a baseline for establishing rent. For example, a home valued at $80,000 would rent for $800 each month.

However, not all property rents can be determined using that method. Markets can change and things can happen, and when they do you need to be prepared for it. Below are five factors to consider when determining rent for an investment property.

Property Taxes

Property tax is something I look into every time I buy a property. If there’s a homestead exemption on it, and you won't be claiming it as your primary residence, those taxes are going to double. When you’re factoring in rent, always make sure you are considering the full tax liability.

Utilities

Utility bills are moving targets. Each month utility costs are going to fluctuate. Energy efficiency features of a property, and tenant behavior will impact the overall cost of utilities. To hedge against this, you can decide what utilities you want to include as part of your lease.

Insurance

At the time of this writing, I own 26 rental units. Every single one of them has an insurance policy that needs to be renewed every year. This year, all of those premiums nearly doubled. When markets get hot and property values go through the roof, so do insurance premiums. Insurance premiums need to be minded when determining rent.

Maintenance

You can speculate, estimate, and speculate some more, but you will never know the true cost of repairs until you get started on a project. But one thing is for certain, you will always have repairs and maintenance when renting a property. I normally estimate between 15 and 20 percent of rents to be used for repairs and maintenance. Planning for those expenses should be top of mind when pricing rent.

Time

In the last two years, I’ve seen a lot properties come on the market that have been listed so high that it would take an investor a decade to get their money back. In my opinion, a 10-year return on a piece of real estate is a bad investment. I always try to target a 3 to 5 year return on investment (ROI) for any property I purchase. Ultimately, when determining rent, you need to price your rental high enough to receive a return that works for you.

Thanks for taking a moment read this article. What tips or ideas do you have for determining rent prices? Feel free to drop them in the comments below!