How To Price Rental Property
What Is the Most Common Method of Rental Pricing?
Many rental property owners will price their rentals based on the sales comparison approach. This approach will place a relative value on the property based on a common and easy to understand metric. Square footage is most often used, but the number of bedrooms and bathrooms is sometimes used as a metric as well. If other landlords are charging $1 per square foot in rent, then it's easy to figure out what your 1,500 square foot single family home will get in rent.
It is important to remember, however, that this approach is just a base line number. Homes that are run down or are in poor neighborhoods won't usually command the average price. Homes in higher priced neighborhoods bring other perks that can raise price rentals.
Capital Asset Pricing Is Also Effective
With capital asset pricing, you're valuing the risks versus the rewards of your own finances instead of looking at what the market can sustain. It's based on the return on your investment that you need to meet certain budgetary landmarks. If you want a 5% return on your investment, then you add 5% to the expected monthly costs you're paying for a rental property, including taxes and maintenance, and that's how much you charge.
A similar approach is called the Income Approach. Instead of looking at the overall return that can be achieved, however, the rental property owner is looking at income benchmarks that can be achieved. The one downfall of both of these methods, however, is if you have high costs that are associated with property ownership. If your costs are higher than other property owners, then your rent will be higher and you'll get fewer tenants.
The Cost Approach Might Be the Most Effective
In the cost approach, the valuation of the rental property is based on what it is actually worth. The land values are combined with the property improvements and then the best use scenario is then considered to set the price of rent. If your property is in the country away from everyone else and there's a lot of land to use for farming, then there may be more value than a 1 bedroom apartment under this scenario and so more rent can be charged.
As long as you keep rental prices within a competitive range, you'll be able to fill your properties with good tenants that will pay their rent on time. This will give you the income that you need and help you maximize your profitability.
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