You’re about to list your property on realestate.com.au and Domain. One of the things you must decide is how much rent to charge for your property.
Setting the right rental price for your investment property will help ensure you maximise your returns on your investment.
It’s important to get the price right at the time of listing. When a property is first listed it appears at the top of the property listings results. That’s when your property has the most visibility. A well-thought-out rental price will ensure you attract a fair number of prospective tenants at the early stages.
Setting a price that is too high at the start will not attract tenants. You could be pricing yourself out of the market and miss out on tenants when your listing has the most visibility.
However, while setting a price that is too low may help you find a tenant quickly, you could be short-changing yourself.
Beware of setting rent using a rule of thumb
Should I just set the rent to cover costs?
A simple rule of thumb is to set rent based on your costs.
That is, the rent you collect each month should ensure that all of your expenses for the property are covered, including the mortgage, maintenance expenses, and insurance. You might even add a little bit extra for yourself as profit.
That seems pretty fair.
However, you may have a low or high interest home loan that skews your expenses. Or, your maintenance is could be disproportionally high to others in the market.
That’s why you can’t rely on this approach alone.
What is the ‘1 percent rule’?
Another simple rule of thumb for determining the rental price is the ‘1 percent rule’.
The 1 percent rule says that the weekly rent of a property is set at 1% of property value.
For instance, let’s say a property was purchased for $400k, then 1% of this should fetch $400/week.
Alternatively, this rule can be thought of an annual yield of 5.2%. There are 52 weeks in a year. So, using the same example as above $400 x 52 weeks = $20,800 rent per year, and $20,800 / $400,000 = 5.2%.
However, this is too simplistic. Depending on the location, the condition of your property, and timing, your property’s yield might deviate from 5.2%.
And in any case, unless you purchased your property recently, it’ll require you to estimate the current property value. That would be an exercise of its own.
Ultimately, you cannot rely on any single rule of thumb. While these rules are somewhere to help you start thinking about the price, but relying on it alone will probably arrive at a rent price that is either too high or too low.
What are tenants thinking?
Tenants are always looking for the best deal, and usually have a few options from which they can choose.
In a tenant’s market, even the $10 per week from your competitors can make all the difference in having an income-producing rental property, versus one that is vacant.
All things equal, a tenant will choose the lower priced property.
With dynamic market forces at play, owners need to understand what the demand for properties are and what the competition is like.
It’s not simple, but there are strategies you can use to calculate a rental value that will be attractive to tenants and ensure your property does not sit vacant for too long.
Resources to help you understand the market
There is a lot of information online that can help an investor decide on a rent price.
You want to set a rent that is competitive against the available properties in your area. However, you also need to consider the features of the properties, such as the property size, the number of rooms, the age of the property, garages, and carports.
Even homes with the same number of rooms and yard size can vary significantly in what they can offer a tenant. A double lock-up garage would fetch a higher rent than a property with an open carport, as would a house with two bathrooms versus a single bathroom abode.
Fortunately, there are online resources you can use to quickly check the value of similar properties in your area and their features.
Statistical resources are incredibly valuable on understanding current rent and trends. In New South Wales, rental bonds needs to be lodged with Fair Trading. When the bond is lodged, it includes the rental amount. This data is collated by the government used to provide statistics about rental prices.
Use this data to understand what the average property your suburb with the same number of bedrooms is recently renting out for.
This is a great starting point for understanding what the market rent is.
Other listed properties
Go to realestate.com.au and Domain and search for similar properties in the same suburb as yours.
You want to look at the listed properties and compare it against yours.
Every home will have strength and weaknesses, and these can also vary according to the tenant’s needs and perception.
The most frequently cited qualities of home owners will advertise are the number of bathrooms and bedrooms in the property. The more bedrooms and bathrooms, the higher the rent.
The age of the house can come into play as well. Older homes generally are more competitively priced than modern homes. Plus, they can also significantly affect the type of tenant you will attract to the property.
Other features of a property that tenants might be prepared to pay extra for include:
- Lock-up garages, carports, and off-street parking
- Pools and large backyards
- Furnished, semi-furnished, or not furnished
- Solar power and air conditioning
Also look at whether the property welcomes pets. Many Australian renters are looking for a property that can also provide a home for their pets. A large backyard with an landlord sympathetic to pets can fetch a premium price. You should assess this against your policy with pets.
Use the resources listed above to review the current rental prices going in your area while using your own judgement to assess the pros and cons of your property.
The government data provides the rental price for the average property in your suburb. Ask yourself, is your property better or worse than the average property in your suburb?
Carefully, compare your property against the properties in those you found listed online. What are they listed for? Would you pay more or less for your property compared to the listed properties?
Once you have answered these questions, you should be able to hone down to a concrete figure of what the reasonable price for your rental property is.
How quickly do you need to rent?
Most owners would agree that getting a property rented fast is high on their list of priorities. A vacant property is loss of income.
Generally, a pricing a property to rent quickly is the best option.
If your property is unnecessarily vacant for 2 weeks, you’ll need 4% higher rent over a year to break even compared to if it rented out straight away.
Not only that, your goal is to also attract the best tenant possible.
A lower price may give you access to a larger pool of tenants, but lower rents can also attract a tenant who may not look after your property.
The trick is to find a happy medium, so you have a reasonably sized pool of qualified tenants from which to choose, while also ensuring they are going to be the type of tenants who will pay the rent on time, and keep the yard tidy.
Test the market
The rental price you advertise is not set-it-and-forget-it. You will need to monitor the market regularly and test the demand.
In a bad economy, rental properties can rise because more people are selling their homes and still need somewhere to live. In this type of situation, it’s usually the smaller, cheaper places which will experience a spike in demand.
The seasons can also dramatically alter rental demand. For instance, in Australia, more families plan to move houses during the school holidays and need to get their living arrangements sorted out before school starts.
Rent prices are not static – follow market trends and adjust your rent.
You will want to adjust your rent so it provides a value proposition depending on what is happening in the market place. Do some testing to ensure you come to a fair market price that also covers your costs, or as much of them as possible.
A note on rent bidding
One strategy owners or agents use, is to list a low rent to generate lots of interest, and then encourage prospective tenants to bid against each other. Although rental bidding is not specifically outlawed in most Australian States, it could be seen as unethical. In any case, advertising a low rent mostly attracts prospective tenants at that price point. It is best to advertise your most accurate assessment of the rental price, which at the same time reinforces yourself as an ethical property owner. This is in fact considered a positive to your tenant and contributes to your income.
To sum up, the amount of rent you charge will be affected by many different variables such as the current market demand, the type and state of the property, and the area. If demand falls, you can compensate by charging lower rents to attract more tenants. When demand increases, there may be value in adding new features to your home that will increase its appeal and allow you to charge a higher price.