If you are new to real estate business or even if you are a more experienced one, deciding on how much to charge your tenants can be a difficult yet important task. The amount you charge your tenants will decide how profitable you will be. To get the best tenants and get the highest rental yield, you need to know more than to just set a rental price for your properties.
Before anything, we need to figure out the best practices of rent calculation. However, there are better options than going around asking people, “How much rental should we ask?” Oof, would that be a bad move.
Hence today, let’s walk through some ways on how to set an ideal rental price on your real estate so you, as a landlord, can get the highest profit margin. At the same time, you can visit our rental valuation checker to see how much you should price your property monthly.
1. Backward Planning From Property Value
The question that we often ask is high rental vs low rental, which is better? Well the answer is, it depends. You can use your real estate’s value to get a satisfactory rental yield amount. With this, you can guess your monthly rent income from that expected rental yield. Generally, without considering capital gain, rental yield for house lower than RM400k has a rental yield of 4% while house higher than RM400k is around 3%.
To do a backward planning from property value, you just need to multiply your targeted rental yield by property price. For instance, property price is RM400,000 and you are targeting rental yield at 4.5%, you will get:
4.5% * RM400,000 = RM18,000
Then divide by 12 months if you are renting out for long term.
RM18,000 / 12 = RM1,500/mo
Bam! So now you know you are targeting at RM1,500 per month rental. The next step is getting your strategy right to make your house worth RM1,500. Stay tuned to the next few factors that you can use to determine your rental rate! Remember, charging too much can also chase away prospective tenants, and you need to focus on renting only to the best of tenants.
Demand in the real estate market can affect your property in a good way or a bad way. Your rental income can drastically change. One of the factors that can cause your rental income to fluctuate is the economy. When the economy is bad, demand for rental properties will rise as not many people can afford to buy houses. In these times, smaller and cheaper properties will have higher demands.
Generally speaking, the lesser the demand, the lower your rental income will be as you want to attract tenants to your property. So, your chances to suffer a loss will be higher if you buy a less demanded high-end property and rent it out for a much lower price. However, when demand is high, you can set a higher price for your rent even if you bought it at a much lower price.
One of the most common ways real estate owners decide on how much to charge for rent is to check out how much other landlords are charging. However, there is one mistake that is made when using this method. When you compare rent between your real estate and the others around the area, you need to compare similar properties. If you have a two-storey house compare it with another two-storey house of the specifications.
You also have to see if the property is furnished or not furnished. Charging more than other local real estate will make it hard for you to find tenants. So, it is important to analyze the local area before setting a price.
Amenities that are available in or near your real estate can drastically affect your rental price and income. But you need to know which amenities have the biggest effect. Amenities such as swimming pools, on-site parking, also washer and dryer can hike up the rental price of your property. As stated in the previous point, furnished homes can make you charge more for your rent than non-furnished homes.
5. Investment Expenses
Most of the time, landlords just use the methods above to determine how much to charge for rent on their real estate. While the methods above give a decent idea on how much your rent price should be, they seem to be missing a key mathematical factor that can seriously affect their rental income.
The methods above do not take into account the expenses that you as a landlord incurred. There are few factors that can result in how much rental income you will make from your real estate. These factors are such as the taxes on your rental income(rpgt), property maintenance fee and cost and also your mortgage payment. These factors should be taken into account for your rental price. Once you have done all of the above methods, calculate how much will go towards expenses each month. Adjust the price if you don’t have any profits.
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