4 Considerations When Setting a Price for your Rental
So you’ve taken the plunge and decided to rent out your house or unit. Renting a property can be a great way to earn some passive income, assuming that your costs can cover your expenses. Figuring out how to price your rental can be tricky – you don’t want to lose money, you want to make as much as you can, but also get a good tenant, and not have to work too hard to maintain…. So much to think about. Check out this list for the top four things to consider when pricing your rental.
- What are your expenses and how can you cover them?
Owning a rental property is just like running a business, and it helps to think about it like a business so expenses don’t get out of control. In my case, I had already put money into renovations and repairs, so it was important that I start to get some money out of my unit rather than putting more in. Expenses could include:
Upkeep and maintenance (shovelling, mowing the lawn etc.). You can sometimes discuss with your tenant who will be responsible for these things.
Repairs and refreshing between tenants. Every time a tenant leaves, the unit needs to be cleaned, sometimes painted, and refreshed. This costs money and time, whether you do it yourself or hire someone to do it.
Utilities. You may choose to share expenses with the tenant, or have them cover wifi and electricity. Other items like oil or a water bill, are sometimes paid by the landlord. If you can figure out the monthly cost for these items, then you can better assess how much a tenant should pay to live in the unit, and benefit from those things.
Property taxes. You will be responsible for the property taxes for the unit. Divide the annual bill to see what the monthly amount will be. Property taxes can be higher than anticipated, depending on where the house is.
Income taxes. Income that you earn on the rent is taxable. You will also have expenses that can go against the income, but keep in mind that the more income you earn, the more tax you may have to pay.
- Location + Market
These two factors are almost entirely out of your control, but will absolutely impact what you can charge.
A good location, like near a hospital, university, or a downtown core, or even in an area where there isn’t much housing, can up the price you can ask for your rental. If your unit is more rural, sometimes this can be a good thing – maybe there aren’t many places available to rent in that area. But if renting isn’t common in the area, charging a high monthly rate may just price your unit out of reach for most people living in the region.
That being said, the market – the number of renters versus units, and how popular a particular area is – can be a huge factor. In an area with very few units with many people wanting to rent, you certainly could charge higher prices. It helps to research the area and find out what other comparable houses or units are going for. Charging more doesn’t always equal less work for you!
- What kind of tenant can pay your price
After researching the market and the location, you might have a pretty good idea of what you think your rental should be worth. You may even believe that you can get top dollar for it – what a deal! The next thing to think about is what kind of tenant can pay the price you want, and whether that’s the kind of tenant you in fact want to rent to.
When I was a renter, I expected more from the landlord and the building whenever I paid more for rent. When I was paying relative peanuts for a shared historical (that is, old and cold), perhaps somewhat illegal unit in a university town, I was content to let things slide, versus paying more than half my take home for what should be a well cared for downtown unit where I expected things to be taken care of, addressed quickly, and to live comfortably.
As a landlord, knowing that charging a lot more for a rental means the tenant will likely expect better service may take away from your ability to make this truly passive income. And that could be okay! Some landlords are capable of doing their own handiwork and repairs, or have a single family home with few disruptions to rent out and don’t expect to be called on often.
The price you set will also often have an impact on whether the tenant is able to live there alone, or needs to get roommates or a partner to share the space. More people = more wear and tear = more maintenance during or between rentals.
- Long term versus short term renters
Obviously if you’ve got this far, you probably aren’t considering a short term vacation rental sort of situation! Short term rentals can be great money makers, but require a lot of work in between guests, and to manage bookings. If you aren’t living right on top of your vacation rental, hiring third party help may be the best option, but it still can get pricey. Since we want to avoid the work of switching out, looking for a long term tenant can reduce the turnover and less turn over equals fewer times you’re in cleaning up, painting, and advertising the unit.
A regular lease runs for a year, and some renew automatically while others will have to be renewed by both parties. Alternatively, some people prefer to offer a month to month lease, with the option for either the landlord or tenant to bring the relationship to an end under certain conditions.
A shorter term lease can be good if you are wanting to use the property more often between tenants, as a cottage or vacation space, or if you’re considering selling in the future. If not, it makes more sense financially to rent it for a longer term, and reduce the turnover between renters.
Simple right? Four tricks to setting the right price for your unit.
- Rental Term