Working out how much rent to charge on your investment property has a huge impact on the performance and overall viability of your investment. You want to maximise the income you can earn each week and therefore increase the return on your investment, but at the same time you don’t want to price the property out of range for potential tenants.
How do you decide how much rent to charge?
Here are 5 ways you can decide how much rent you should be charging for your property:
- Look at the market. What are the median rental prices in your area? Try to look at the rents charged for similar properties to yours too.
- Look at your property. Consider the type of property, number of bedrooms, features, parking options and overall condition of your property. These factors can all have an impact on your rental amount. Make sure you're comparing apples to apples. A large 3-bedroom house with a backyard is not the same as a 3-bedroom unit, even in the same street.
- Consider your expenses. While the rent shouldn’t be determined based solely on your need to cover all the expenses associated with your property and still be able to generate an income, you’ll need to take this into account to determine the viability of the investment.
- Get professional help. As well as seeking an independent assessment, you should consult a property manager and a financial planner to help you set your rental amount to ensure that it suits your investment strategy. Make sure to hunt around for a property manager you feel comfortable with and who has excellent local knowledge — experience can be worth its weight in gold.
- Adjust the rent. Don’t simply "set and forget" the rental amount. Stay up to date with the rental market to work out if you should make an adjustment to maximise your rental returns. For instance, if property prices in the suburb surge by 10% over a 5-year period, you may want to consider charging a higher rental amount to reflect the market conditions.
What factors affect how much rent you can charge?
Comparing rents for similar properties is a great place to start. And you can also focus on the various factors that make your property, and it's location, unique and desirable.
- Amenities. Being close to schools, shops and public transport makes a huge difference to prospective renters.
- Neighbourhood. Most renters are going to prefer an address in a quiet street. But this depends on the renter too. If you're renting out an apartment in a busy but very popular area with lots of nightlife, you may want to target younger renters.
- Supply and demand. If there aren't many rentals available in the area, and plenty of applicants for your property, the fundamentals of supply and demand might be in your favour.
- Build quality and finishings. If you believe your property is newer, nicer and better-finished than the majority of comparable local rental properties, you should factor this into the amount of rent you charge.
Miriam Sandkuhler, an accredited property investment advisor and buyer's agent from property advisory firm Property Mavens, says the location of a property and even the time of year can also be contributing factors to the amount of rent you can charge.
"Proximity to amenities such as public transport, schools, shops and lifestyle amenities such as cafes and restaurants will also impact how much rent you can ask for. The closer to amenities, the better," she says.
"Time of year and season make a difference also; winter and mid December to mid January aren't great. The end of the year uni term isn't great either, as students often go home and break leases or end them then and finding a replacement tenant may take a while."
It's also important to consider the quality and nature of the property itself: Is it a house or an apartment? How many bedrooms does it have? What sort of condition is it in? Does it include parking space or a gym in the apartment block? These factors can all have an influence on how much rent a prospective tenant would be willing to pay.
Traps and pitfalls to avoid when setting the rent
Just as with any other investment, there are problems you'll do best to avoid when setting the rent on your property. "Don't be greedy. Your property could sit on the market for a while," Sandkuhler says, "and always make sure you are offering a property where everything is in good working order, safe and neat and tidy. You have a better chance of attracting the right tenant and ensuring they keep the property in the same condition you have provided it in."
Sandkuhler also warns against asking for too much rent in an oversupplied market. "You will find your property sitting without tenants for weeks, if not months," he says. "It is best to drop $5 below the market price per week to attract prospects."
If you take the time to consider all the factors that could affect the rental price for real estate within your area, you'll be much better positioned to maximise your rental return — and therefore ensure the success of your investment and the satisfaction of your tenants.
Example: Renata sets the rent too high
Renata has just purchased a four-bedroom home as an investment property in Sydney’s north-west. After a quick glance around at some of the rents being advertised for similar four-bedroom properties in her suburb and the adjacent suburb, Renata sets the rent at $750 a week.
What she doesn’t realise, however, is that $750 a week for a four-bedroom home in her area is right at the upper end of the price range in the current market. Not only that, but the landlords asking for this much rent own properties that are newer and in better condition than Renata’s, not to mention in much closer proximity to public transport, restaurants and shops.
As a result, Renata advertises her property for 9 weeks and is unable to find a tenant. With her ongoing mortgage repayments starting to make an impact on her finances, Renata lowers her asking price to $720 a week and soon finds a tenant.
In those 9 weeks without a tenant, Renata lost herself $6,480 in potential rent.
Need a better deal? Compare investment loans in the table below