Working out the right rental amount is crucial to the success of your investment strategy
Setting the rent 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.
Deciding on the rental amount is a difficult process and there are plenty of pitfalls you should avoid, so read on to find out how you can determine how much rent to charge your tenants.
What factors affect the rental amount?
While setting rent at a suitable level might sound like a simple process, it can actually be quite complex. While you might have come across some basic guides and rules of thumb for setting the rental amount — for example $100 of rent for every $100,000 of value in a property — such equations fail to take into account the many factors that affect how much your tenants will reasonably expect to pay.
“It is very important to be up to date with current market activity, trends and cycles,” says Sasha Hopkins, CEO and Head Strategist at investment mentoring and introductory service The A Team Pro. After starting in property investment at the age of 21, Hopkins accumulated a $3.5 million property portfolio on a single income by the time he turned 26. Now aged 27, he says it’s vital for property investors to consider supply and demand.
“If there is a minimum amount of available property in an area, you can ask for the higher end of the market price (demand). If there is a high amount of available rental properties, tenants have more to choose from and therefore you should price your property competitively to attract tenants (supply). It is best to work with a credible local agent (a property manager) to help determine the correct price,” he says.
Miriam Sandkuhler, an accredited property investment advisor and buyer’s agent from property advisory firm Property Mavens, adds that 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.
How to decide on a suitable rental amount
You’ll need to consider the following factors when setting the rent on your investment property:
- Look at the market. What are the median rental prices in your area? Also, look at population statistics and trends to help you figure out what rental supply and demand is like in your area.
- 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.
- Compare apples with apples. Look around at other comparable properties in your local area to gauge how much rent could be suitable. “It’s important to understand how much comparable properties are renting for and to ensure they are in fact comparable,” Sandkuhler says. “For example the same number of bedrooms, bathrooms, car parks, property type, similar fit out and location. This will give you a feel for the market price that is specific to your property.”
- 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 an independent assessment. An independent rental assessment can ensure that you charge a fair price for your rent. “I buy a lot of property for my clients as a buyer’s agent specialising in investment property and I always have an independent rent assessment done before I buy so that I am working with a conservative figure and not a selling agent’s often exaggerated rental figure,” Sandkuhler says.
- 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. “A professional property manager is your ally in managing a rental property and knowing first-hand the state of the rental market in that local area,” Hopkins says. 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.
Renata sets the rent
Renata has just purchased a four-bedroom home as an investment property in Sydney’s north-west. Eager to start receiving rent from tenants in order to help her pay off the mortgage on the property, Renata spends little time deciding on a suitable rental amount. 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 two months and is unable to find a tenant. With her ongoing mortgage repayments starting to make an impact on her finances, Renata bites the bullet and enlists the help of a professional property manager. At the agent’s advice, Renata lowers her asking price to $700 a week and soon receives applications from several potential tenants.
Traps and pitfalls to avoid
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 as 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.”
Hopkins 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. Another strategy could be offering a free week’s rent to get the price you want.”
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.