Rentals often are an overlooked segment of the marketplace. And just like when placing a property on the market for sale, with the value of the property based on what a purchasing public is willing to pay, the same is equally true of the rental market. Real estate investors need to know the importance of a rental market analysis.
Setting the right rent in order to find a tenant quickly is crucial to successful marketing of any property listed for rent. Similar to the residential sales market, setting rents too high or too low can be catastrophic for a property owner in regard to the amount of time it will take to locate an acceptable tenant.
Setting the Right Price
The right price on a rental property is based on several key items: the location, the school districts and the square footage. Properties that are in popular locations--with highly rated school districts--will rent before properties that are in less desirable locations. In most markets, these properties also will rent for higher amounts. When reviewing facts and figures for rental properties, it is important to note these factors.
Ultimately, a pricing determination should be comprised of two factors: what is currently on the market for rent and the price of properties that have been rented for the past three months. Pricing for individual properties should be in harmony with these two factors, using a price-per-square-foot calculation for determination.
If an investor owns a property that is 2,000 square feet, and similar rental properties in the area are renting for $1,700 per month but are 1,900 square feet, the formula used to calculate rent for this property would be as follows: $1,700 / 1,900 = $0.89 per square foot. So for a 2,000-square-foot property at the same rate, the following formula should be used: 2,000 x $0.89 = $1,780 per month in rent.
Just like selling a property, the amount owed on the mortgage is irrelevant to market conditions. Prior to purchasing a property to rent out, or converting a property for sale into a rental home, it is wise to have a rental market analysis performed in order to set a fair market price for a property.