Probably the most common question for most new landlords in Maryland is “How much should I charge for rent?
While this is a good question, there are a number of additional considerations property owners must first address in order to arrive at a rental fee.
What are the neighbors like?
What does the property offer?
Is it in good condition?
There are multiple tools, resources, and management groups available to help you navigate through the entire process.
Important Considerations to take into Account in Your Plan to Lease a Rental Property in Maryland
Survey the Market
In part, your rental fee will be determined by the local market. For instance, what you charge in Baltimore City for a two bedroom property will likely differ from the amount tenants would pay for a property in Montgomery County. In fact, what you may be able to charge may vary even from street-to-street in the more popular areas of Maryland.
Property investors have to research competitors’ rental properties in the area in order to make informed – and sometimes creative – decisions.
Roughly, rent is often around 1.1% of the home’s value. If you have a three-bedroom home worth $75,000, you can probably charge about $825 per month.
There are several caveats to this rule. First, if the home’s value exceeds $100,000, the percentage drops. By $350,000, you may only be able to charge 0.8%, perhaps less. Second, this estimation is only for 12-month leases. If you rent by the month or quarter, your rent prices will typically be higher.
And as with most things in real estate, timing is everything. The pricing that worked six months ago may not meet current demands of the market. You must make sure that you base your rental fee decision on the stability and demand of the current market in your region.
Estimate Minimum Required Return on Investment (ROI)
Before attaching any numbers, you should estimate how much you would need to collect each month to keep the business afloat. To calculate that, first add up all of your predicted expenses. Getting an exact number may be difficult because some expenses have multiple considerations of their own and can vary from county to county in Maryland.
Common Rental Property Expenses
- Advertising. You cannot fill properties that sit unknown to the public, so advertising is important. This includes the total amount spent on a website (if you have one), signs, other website listings, and advertisements.
- Travel. Driving between your properties, then to the accountant, and back to the bank all count as wear and tear. Do not exclude your vehicle from the equation.
- Cleaning. How much will it cost to turn over a rental property between tenants? What about regular landscaping and mowing outside of each unit? Tenants expect their landlord to take good care of these things.
- Maintenance. Things happen. Roofs begin to leak, and furnaces break down. There are always additional things that need to be done. This cost depends heavily on the age of your property and its appliances. A good way to estimate repair costs is to assume 5% of the monthly rent. Older buildings might be higher than 20%.
- Legal Representation. Never skimp on the details included in your lease. You need something ironclad to protect your investment and business interests.
- Taxes and Insurance. You may set up an escrow account or pay each separately. Both taxes and insurance are needed by landlords to cover major accidents and damage. Keep track of your tax documents because you can write off much of it when you file taxes with the IRS.
- The Homeowners Association (HOA). Sometimes this fee is difficult to uncover. A real estate agent or property management company will likely have a record of it.
- Vacancies. If you prorate your rent or have a lot of short-term tenants, you may want to estimate about 10% of monthly rent toward vacancies. You can remove vacancy expenses in your calculations for tenants who are in the middle of long-term contracts.
Once you estimate what you need to make, you can divide by the number of properties to calculate your “break even” number for each unit. Now, you need to determine what you can make. Remember, it’s important to leave enough of a budget to invest back into your business for routine maintenance and emergencies.
Follow the Numbers
There are a few tricks to determining a reasonable profit expectation for your property. For instance, many listing sites like Trulia and Zillow screen all available rental properties in your area. This will give you a quick idea of what prospective tenants expect in terms of square footage, price, number of bedrooms, and more.
Rentometer.com is another helpful tool. It lets you enter an address and number of bedrooms, and then it provides you with a complete list of comparable rental properties.
Next, you can use one of the housing market’s favorite tools: the Price/Rent ratio. This quick calculation will help you broadly determine if your local market is stronger in home ownership or rentals.
Calculating a Price/Earnings Ratio (P/E)
To sustain long-term in a housing market, an average P/E of 16.00 is necessary. Pretend you are looking to rent out a property in Baltimore County, and a house you found is listed at $388,000. Currently, a tenant who rents the property for $1,525/month occupies the home. Divide $388,000 by the total rent paid over the last year, $18,300, and you get 21.20.
This P/E tells us the house is likely priced far too high for its market. If other houses in the area are similarly expensive, the market will eventually stall until the average home purchase price decreases. Ultimately, a P/E ratio helps set fair prices in each market. You want to be able to compare prices directly to similar rental properties in your area, and this allows you to do so quickly.
The more listings you contrast, the better idea you will have of what prospective buyers are willing to pay. You do not want to gouge tenants, but you do need to make a profit.
Find Expert Help
Trying to navigate through all of the considerations that go into a rental property fee can be overwhelming for many private owners trying to manage investment properties on their own. This is why many landlords turn to experts like Bay Property Management Group to help them make the most informed decisions for their investments.
Bay Property Management Group has extensive experience with all matters of professional property management in Baltimore County, Prince George’s County, and throughout Maryland.
We have a thorough understanding of the local market and will work diligently to make your job as landlord as simple as possible. Our promise to you is complete control over your property without any of the headaches.
Contact us today for answers to your questions about investment properties throughout the Baltimore-Washington, D.C. metro area.