- November 11, 2020
- Posted by: Editor
- Category: Advice, Investment, Strategy
Cash flow is one thing you should keep in mind when deciding the right rental rate for your income property. You need to ensure that the rental income will not only cover your mortgage payments and other rental expenses but also leave some profit. This positive cash flow will allow you to exponentially grow your investment property portfolio by reinvesting your profits in other cash flow properties. It will also help you to create a cash reserve to cover unexpected expenses.
However, working out how much to charge for rent to achieve positive cash flow can be tricky. Of course, as a landlord, you want to maximize the amount of money you make from your investment. If you charge a very high rental rate, however, you risk putting off potential tenants and losing potential rental income especially if they have other options. This could affect your cash flow considerably.
With this in mind, one of your top priorities should be to avoid vacancy periods if you want to generate positive cash flow. If you want to minimize the risk of the property staying vacant for too long and maintain a sustainable cash flow, you need to set a rental rate that will be deemed reasonable by both parties.
While you want to attract tenants, charging a very low rental price is not the solution. It’s also essential to charge a rental amount that would provide a good return.
Calculating Rental Rate
To determine the appropriate rental rate for cash flow, you need to consider a number of factors. Here’s how to determine rent price.
- Know the Value of Your Investment Property
To get a rent estimate, determine the market value of your rental property. Generally, your rental rate should be between 1% and 2% of your investment property’s value depending on the location. However, since the 1% rule and the 2% rule don’t take rental property expenses into consideration, they should only be used as a guideline.
- Cover Your Rental Property Expenses
When trying to determine a good rent price for cash flow, you should factor in the rental property expenses. Do your research so that you have an idea of your recurring monthly expenses. This includes maintenance costs, mortgage payments, insurance, property taxes, rental income taxes, vacancy periods, HOA fees, utilities, property management fees, etc.
Since your goal is positive cash flow, you should set a rental rate that is high enough to cover your expenses and generate positive cash flow. You don’t want to be losing money every month. If you have a target amount of monthly revenue, you should factor it in your monthly rent after monthly expenses.
- Check What Other Landlords Are Charging in the Area
Rental prices are usually dynamic and may change depending on demand and other local market conditions. Therefore, you need to conduct a rental market analysis to determine the going rate for comparable properties in the area (rental comps). Your potential tenants will also be checking rental comps to see whether your rental rate is fair. Market rent is an essential guideline for landlords who want to determine rental rate.
Once you’ve accounted for the rental expenses, see how your rental rate compares to that of the rental rate comps, then adjust accordingly to get a rent estimate. You should not price your rental significantly higher than the market rent to avoid turning away potential tenants. Try to keep your rental rate slightly below the market rent.
But what is the difference between market rent and actual rent charged? Well, since market rent is dynamic and is for the effective date of the appraisal, it may differ from the actual rent charged under current lease contracts (contract rate).
Knowing how to calculate rental rate is one of the most crucial aspects of being a successful landlord. It’s essential to set an appropriate rental rate that generates positive cash flow consistently. Don’t just pick any figure as your rental rate. To make optimal returns and attract quality tenants, you need to consider several factors before you price your rental property.