How to Determine Your Rental Price

If you are a new landlord, the first question that pops into your head is probably, “How much should I charge for rent?” This is an important question and has a huge impact on your financial success as a landlord. If you undercharge, you lose money monthly, but you also will diminish the value of your property. Overcharge and the property will sit vacant for an extended period with no rent money coming in, and bad things tend to happen to vacant properties. So, picking the right rental price is like the children's fable The Three Little Bears, where you want to pick the rent price that is “just right.”

There are a few simple techniques as well as online websites that will assist you in determining the “just right” rental price. You may want to try several of them to get a range of rental prices that might work for your property.

Ask the Neighbors

One of the simplest methods is to ask the neighbors around your rental property. Ask them what they think it might rent for or maybe what they are paying in rent. Nothing more complicated than that and you may get some great information. Start a conversation and hand them your card, as they might also know somebody who could be interested in renting your property.

If the neighbor says they are paying $1,200 per month and your building is similar in beds, baths, square footage, appearance, and amenities, that amount might be a pretty good starting point. Even if your property has a slightly different number of beds or bathrooms, you can make small adjustments up or down to come up with a good starting point for your monthly rent. This is not an exact science, but it is quick, easy, and fairly accurate.

What Did the Last Tenant Pay?

Another simple method is if you had a prior tenant, what did they pay per month? Start there and adjust for local or national rent trends. In 2021 rents increased on a national basis by almost 11.6% and in 2022 they are expected to increase by another 10% to 15%. Simply take the old rent and adjust for these trends.

The 1% Rule

When trying to determine your rental price, you can use the “1% Rule,” which states a rental property will rent for about 1% of its sale value. This is a rule of thumb, as many areas will rent for more or less. My experience over the years, however, is that most properties will rent somewhere in-between the .8% to 1.2% range of the property value. If your property is worth $200,000, you could anticipate a monthly rent of approximately $2,000. But the range may be $1,600 to $2,400 per month.

There are also many websites that are designed to help estimate what a property should rent for; Some are better than others. I recommend starting with the ones I listed below.

Zillow.com

Zillow is by far the most popular website for looking at homes that are for sale. But they also list millions of properties for rent and offer a number of services to landlords.

The website uses an extensive computer algorithm called the ZestimateⓇ for determining what a property might sell for. If you ask different people, they will have a variety of opinions on how accurate Zillow’s tool is at predicting a home’s sale price. That is a deeper conversation for another day. Zillow also has an algorithm designed to predict rental prices known as the Rental ZestimateⓇ. This is where you want to start your online process of determining the rental price for your property.

Start by going to Zillow.com and on the first page there is a spot to enter your property address and then click the “search” button. Make sure that Zillow has the right property and then select your property. Then a report will pop up and go to the section titled “Your Home Value.” You will see the Zestimate for your property but if you click on the “Zestimate History & Details” you will then be able to see your Rental Zestimate. This is the amount Zillow thinks your property will rent for each month.

Zillow’s Rental Zestimate is a proprietary algorithm to determine the monthly rental price for a specific property. The Rent ZestimateⓇ uses public property data and similar local properties listed for rent as part of the algorithm. There can be special features or difference between your property and Zillow’s Rental ZestimateⓇ that might lead Zillow’s number to be inaccurate. But if your property is a single-family home and similar to other properties in the area, it is generally accurate.

The Rental ZestimateⓇ does have a couple of weaknesses you should be aware of when using. First, Zillow uses data from the prior six to twelve months. Since the pandemic, both real estate prices and rental prices are both surging up 15% to 20% across the US. But Zillow may be using data that is up to twelve months old. As a result it may be using a lower price point to determine the Rental Zestimate.Ⓡ In today’s market, Zillow Rental ZestimateⓇ may be on the low end compared to more recent activity. Also, it does not work nearly as well for multi-unit dwellings. For example, you might type in an address, and Zillow might return an estimate of $3,500 for a rent estimate. However, it does not factor in how many units are at the dwelling. If you own a three-unit building, it does not understand that there are three tenants versus a single family home. So be aware of these weaknesses.

DelValProperty.com

Zillow is by far the largest real estate site, but there are many other online tools that can help you to discover the rental price for your property. For example, my company Del Val Realty & Property Management has a tool for landlords to determine the rental price at https://www.delvalproperty.com/philadelphia-property-management.

Similar to Zillow you go to our site and enter the address. Then, provide some basic information like numbers of beds, bathrooms, square footage, and if it is single or multi-family. From that input, you get a much more detailed six or seven-page Rental Property Analysis Report, showing the estimated rental price but many other important facts as well. These additional items include a list of the actual properties it used as comps and charts showing the five-year trend in pricing and time to rent properties.

Redfin.com

Another site similar to Zillow is Redfin.com. You simply go to their website and drop in the property address and a rental price estimate will pop up onscreen. Where Zillow gives a single number, Redfin will give a range of where they think the rent price will land.

My recommendation is to play around with these various price strategies to acquire a range for your property. Whatever tool you use and whatever amount you settle on, this is the starting point and ultimately the real market will dictate where your rent will fall.