You have taken the plunge and now own an investment property. The goal is to rent it out so you are able to have tenants pay down the mortgage while you build equity. But finding that sweet spot of charging too much or too little is important. How much you should charge for your Austin rental property depends on the location, the type and size of the property and the condition of the home with any amenities.
Consider what the going rents are in the area. A single family home in a high-end community will have a similar rent rate as other homes in the area. But a condo will be less. A similar home in a less desirable neighborhood won’t warrant the same price as the home in the high-end neighborhood. Understand what is common in the area. This data is readily available via real estate agents and even through online real estate sites such as Zillow or Redfin that offer rental estimates.
Condition of the Property
Once you know what the general area warrants rental rates, you can start to evaluate the property based on its condition. This is similar to what a home appraiser does when evaluating the fair market value of a home. A remodeled or new home with new appliances, roof and landscaping are going to get more in rent than one that is older and in need or upkeep or repairs. While a rental property owner doesn’t want to overprice a house, he should also be aware to not underprice it. This can affect long-term cash flow and may create problems if the property is in need of significant repairs.
Amenities and Extras
Just like a house appraisal, the value of the home gets credits up for extras. Things like air conditioning or a covered patio increase quality of life and add more usable space to the home. A swimming pool, access to a gym or tennis court are amenities that increase the value of a rental. Consider all the upgrades you have made or the unique things that renters have access to because of living at that location. Each of these helps increase the attraction of good tenants and raise the value of the rent you can command for the property.
Formula for a Starting Point
Real estate agents will tell you that the rent is based on a percentage of the home value. This is a starting point that ranges between 0.8 percent and 1.1 percent. This means a $300,000 home can garner rents between $2,400 and $3,300. Remember that this range is conditional to the area, condition, and amenities the property provides. Check with local state and city ordinances to see what your allowable annual rent increase rate is for Austin. There may be a maximum you can raise rents. Some rent control areas prevent you from raising rents. Housing prices do fluctuate so keep in mind that your range will not adjust in rapidly changing housing values of the area.
Should I Underprice Rent?
There are two schools of thought about charging less than the maximum value for rent. You need to ensure you have enough cash flow to reinvest into the property to maintain it if necessary. You must also consider what your options are if there is a drop in property prices. However, some landlords will look at the market and what they can get and then discount it. The reason for this is to find the best tenants who want to be in the home for a long period of time. This is a double-edged sword. A tenant paying less may not take care of the property while another feels a sense of obligation to care for the property knowing that the landlord is giving them a deal. Run the numbers and do what makes sense for you.