One of the most common questions for landlords is, “how much should I charge for rent?” While this is a good question, there are several considerations property owners must first address to arrive at a rental fee. For instance, what are the neighbors like, and what does the property offer? Luckily, multiple tools, resources, and management groups can help you navigate the entire process. So read along as we go over how to calculate the rent value of investment properties.
How to Calculate the Rent Value of Investment Properties
To calculate the rent value of any given investment property, you’ll have to do some research. Investors and property managers in Baltimore must look at the market, estimated expenses, comparable properties, and their price-to-earnings ratio to determine the value of a property. So, read along while we review the most crucial factors in calculating the rent value of an investment property.
- Survey the Market
- Estimate Minimum ROI
- Follow the Numbers
- Calculate a Price-to-Earnings Ratio (P/E)
Survey the Market
To calculate the rent value of a property, you have to look at the local market. For instance, what you charge in Baltimore City for a two-bedroom property will likely differ from what tenants would pay for a property in Montgomery County. In fact, what you charge for rent may vary from street to street in the more popular areas of Maryland.
Property investors must research competitors’ rental properties to make informed – and sometimes creative – decisions.
Generally, rent is often around 0.8% to 1.1% of the home’s value. For instance, if you have a three-bedroom home worth $75,000, you can charge around $825 per month.
However, there are some caveats to this rule. For instance, 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 generally be higher.
Additionally, like most things in real estate, timing is everything. The pricing that worked six months ago may not meet the market’s current demands. So, you must ensure that you raise your rental rates based on the stability and demand of the current market in your region.
Estimate Minimum 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 costs have multiple considerations of their own and can vary from county to county. However, here are some ordinary rental expenses you’ll need to consider when calculating the rent value of an investment property.
Common Rental Expenses
- Advertising- You cannot fill properties that sit unknown to the public, so advertising is essential. Advertising costs include the total amount spent on a website, signs, other website listings, and advertisements.
- Travel- Driving between your properties, then to the accountant, and back to the bank all counts as wear and tear. So 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- Maintenance costs depend 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- Pay attention to the details included in your lease. After all, you need something irrefutable to protect your investment and business interests.
- Taxes and Insurance- You may set up an escrow account or pay each separately. Landlords need both taxes and insurance to cover major accidents and damage. So, keep track of your tax documents to write off applicable expenses when you file taxes with the IRS.
- Vacancies- If you prorate your rent or have a lot of short-term tenants, 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, leaving enough of a budget to invest back into your business for routine maintenance and emergencies is essential.
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. Finding similar rentals will give you a quick idea of what prospective tenants expect regarding 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 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.
Calculate a Price-to-Earnings Ratio (P/E)
To sustain long-term in a housing market, an average price-to-earnings (P/E) ratio of 16.00 is necessary. For example, suppose 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, allowing 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 for Your Rental Investment
Trying to navigate all of the considerations that go into a rental property fee can be overwhelming for many private owners trying to manage investment properties independently. As a result, many landlords turn to experts like Bay Property Management Group to help them calculate the rent value of investment properties.
Bay Property Management Group has extensive experience with all matters of professional property management in Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
We thoroughly understand the local market and will work diligently to make your job as a 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.