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How to Determine Rental Prices for Housing

by Andrew Latham

Unless a residential property is located in an area with rent control, there's no maximum or minimum price or any fixed equation you must follow when calculating the cost of rent. In general, rental prices are determined by the market. In other words, the correct price for a property is whatever renters are willing to pay for it. Although there isn't a magic formula to determine what that amount is, there are some general guidelines that can help you estimate a realistic price for a property.

Calculate 1.1 percent of your home's value. To do this, multiply the value of your home by 0.011. For example, if your home is valued at $90,000, the result would by $990. According to a July 29, 2010, article in the "Wall Street Journal," this is a rule of thumb professional investors often use to calculate the monthly rent of properties with a value of up to $100,000. For properties worth more than $100,000 you should expect a lower rate of return, because there are fewer people able or willing to pay that much rent.

Research the rental prices of similar properties in your area. The price at which other landlords are renting properties comparable to yours will give you a good idea of where the rental market is in your neighborhood. Online rental listings and free rent-calculation tools can help you compare the rent price of properties by type and location.

Adjust the rent you charge based on the pros and cons your property offers. List the amenities or special advantages your property has, such as cable TV, any utilities you include in the price, a swimming pool, a garage, mature trees, a good school district or a low-crime area. Extras like these may justify increasing your price over and above that of other properties that don't offer them. Similarly, if your property has significant deficiencies or does not offer amenities other similar rentals include, you may have to reduce your asking price to stay competitive.

Tip

  • Another method investors use to calculate their rental price is to determine the cost of capital of their rental property. This means determining what would be the next best rate of interest you could expect by investing elsewhere. Although this doesn't tell you what renters will actually pay, it may help you set a minimum rental price. For example, if you know you can get a 15 percent return on your money from another investment, multiply the equity you have in your rental property by 0.15 and divide the result by 12. Equity is the ownership interest you have in a property, meaning the property's market value minus any debt you still have to pay on it. To illustrate, if you own your home outright, it's valued at $200,000 and you know you can make 15 percent a year by investing that money elsewhere, the monthly cost of capital for your property would be $2,500.

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