The rental property business is booming. Here’s why: Investing your money on rental properties is a great way to earn passive income. Imagine being able to make a good amount of profit without having to go to a 9-to-5 job? This sounds like a dream to anybody.
However, it is not as easy as it looks. There is still some work and research that should be done before getting into the rental business. It is quite common for investors to get excited over the idea of easy passive income but then fail to do their research on the basics of the rental business.
One key thing that you should take note of is how much profit should you earn. As an investor, how much money should you put into investing in a rental property and how much can you earn from this?
Here is a list of things that you can take note of to determine how much profit you should make on a rental property:
In any business, it is important to take note of who you are competing with. What are other rental businesses doing that you can copy or avoid? There are a few things to take note of when it comes to competition.
Number one is the neighborhood in which your rental property will be. When choosing a location for your property, look at how other neighboring properties price themselves. Number two is property size. Take note of things such as the number of rooms, the area, and etcetera to determine the price of your rental. In addition to size, you should also take note of how many possible people will be renting a single property. For example, will it be occupied by one family? A single person? Maybe multiple families? How much should you price if more people are occupying your property? Again, check out what similar properties are doing and price accordingly.
Lastly, you can also take note of how old your property is. Usually, newer establishments will be priced higher as compared to older establishments because people are willing to pay more.
The inside matters just as much as the outside. Another factor to take note of is the amenities of your property. Here are the top amenities that tenants look for when renting property. Take note of these to better gauge how much you can price your rental property.
- Parking – An essential. This will give you a huge advantage on renters. Availability of parking space is important for people staying in a new place especially if it’s a condominium or apartment because parking spaces can be hard to find. Indicate important details about the parking. Some things that you could consider: Is there assigned parking? How much parking space is available? Are there other places to park such as street parking?
- Security – When entering a new place, you would want to make sure that you are in a location that is safe and secure. Having security would be an added perk for renters to have peace of mind. Indicate security details such as whether or not the place has security and the type of security involved.
- Walkability – It is a huge pro if your property is located near other well-known and essential landmarks such as malls, grocery stores, parks, and etcetera. Renters would more likely be attracted to stay at your property id they know that it is near other places that they can enjoy as well.
- Outdoor Entertainment Areas – Another exciting perk would be if your property had outdoor entertainment areas! These are fun places that your renter could go to for fun and leisure. Examples of this are swimming pools, balconies, patios, and sports courts. This would definitely make your property rental more attractive, especially to more active and outgoing types.
What is the view outside of your renter’s window? Picturesque views of the city, for example, are more likely to sell as compared to a property that simply had a plain view of the road or a parking lot. Location plays an important role in how much you can price your property. The better the view, the more willing the renter is to pay.
The newer, the better. How updated are the amenities inside your property? Renters are more likely to enjoy valuables that are newer. Newer items also look a lot more appealing than items that are used or have been worn out. Do the walls have cracks in them? What model is the television? Are there any stains on any of the furniture? Update your amenities to upgrade appeal.
5. Square Footage
This pertains to how much space your property has. How big is the property overall? How big are the rooms? Are the rooms big enough for the number of people occupying it? Renters are willing to pay for bigger space. Space plays a big part in overall comfort at the property after all.
6. Floor Level
Preferably, renters are content with floor levels that go 1 floor up. You might have to start lowering your prices if there are more than three floors at your property. Usually, people do not have the energy to walk that much hence making three floors a less desirable floor level for them. Think about the overall experience that your renters will have while they are renting your property. Little details could have a big impact on how much they are willing to pay.
7. Market Demand
It is important to constantly look at trends happening within the market and adjust your prices in accord with the market’s demand. For example, now that the COVID-19 pandemic is currently going on, there is less of a demand to rent. This is because most people who rent condominium or apartment units rent these because it is near their workplace or school. With online learning and work from home going on, previous property renters opt to stay at their parents’ house or family home where they can save their money instead of having to spend it on rent. With this currently going on, property investors should price lower in an attempt to appear more attractive during these trying times.
On the other hand, when it was school year season pre-pandemic, property investors could price higher since many young adults are looking to rent condominium or apartment units near their work or their school.
The golden rule for renting out your property is: when the demand is high, price higher. When demand is low, price lower.
The time in which you rent matters. If it is the Christmas season, most likely, people are not willing to rent property because they would choose to stay with their family at home for the holidays. Choose to invest in a property when you know that the season calls for it.
All of these factors play a part in determining how you will price your property and in turn, how much profit would be predicted out of your property. You can predict this better by measuring your property’s Return of Investment (ROI). The ROI is a great way to take a look at your property’s profitability.
How to measure Return of Investment:
What is ROI?
It is a measurement of how much profit is made on an “investment” as a percentage of that investment. This will help you figure out if your money will be worth placing on an investment property or not.
How do you calculate the ROI? Use the formula below:
ROI = Gain of Investment – Cost of Investment
Cost of Investment
This formula looks simple, but remember that there are several factors that come into play with rental properties. These include expenses made on repairs and maintenance and ways of figuring leverage (which is the amount of money borrowed with interest to make the initial investment).
Now that you have an idea of pricing, go out there and start your rental property business. List on places like Facebook Marketplace, Lamudi, or iRent Mo to get ahead!
Knowing all of these basics of property rentals will help you be an informed investor. Investing in a rental property business can be a great source of income. However, if not done right, can go wrong in many ways. Stay educated and invest wisely!
How Much Profit Should You Make on A Rental Property?
Eberlin, Erin. “Deciding How Much Rent to Charge Tenants.” The Balance Small Business.
Folger, Jean. “How To Calculate ROI on a Rental Property.” Investopedia, Investopedia, 28 Jan. 2021.
“How Much Should I Charge for Rent: A Guide to Rental Rates.” SmartMove.