How Much Rent Can A Landlord Charge A Tenant?
How much rent can I charge?
Answer
A critical component of a landlord’s business is the setting of rents. The net cash flow from a rental property depends on the rents collected less the expenses of ownership and operation of the property. Additional cash flow usually results from tax savings due to depreciation deductions.
Except in those of jurisdictions that have rent control, the landlord has the right to set rents at any amount he chooses. However, rent that is too high can add to the length of time a property sits vacant. Prolonged vacancy means additional costs that cannot be offset by a subsequent rental. Rent that is too low can bring more applicants, but many of those may not be qualified under the landlord’s rental standards. If the landlord’s costs are not met by the rental rate, it may not make sense to offer a low rent rate to avoid vacancy, and then lose money from such a low rate.
Most landlords set rents at amounts in a range that is consistent with the market rent, the rent for comparable available units in a specific area. A common practice is to charge a rent amount that is at or slightly below the market rate for similar units and amenities in the neighborhood. Studies have shown that tenants who feel their rent is set at a fair rate are less likely to become troublesome tenants and in fact have a longer tenancy stay than the average.
Setting the rent much above the market price has a number of implications. First, it is likely a landlord will receive fewer applicants from his advertising efforts. Tenants searching for a new rental can very quickly determine the value of a given type of unit in a particular area. For many, maybe most, tenants, a rent being even only 10 percent above market will eliminate the unit from their search. Second, fewer applicants means a reduced pool of screened prospects from which to select a tenant. This may require that a landlord adjust his rental standards in order to fill the vacancy or be willing to accept a vacancy remaining on the market for a longer time by maintain the current rental standards.
The best way to determine market rents is to perform a market survey. This can be as informal as talking with fellow landlords of neighboring properties. Or, a more inclusive survey could be checking various online rental listings and local classified ads, personal visits to available rental units or researching local real estate market data. In general, the more surveying and collection of information, the more closely a landlord can determine market rent. However, a landlord must be certain that he is comparing similar properties in the same area. As a rule of thumb, for comparison purposes, a landlord should pick the properties that most renters are likely to consider for their next move.
The decision regarding how much rent can be charged cannot be reached by using simple formulas. Rent rates always depend on several factors:
- Market conditions – that is, supply and demand for property of the location, type, and condition of the landlord’s property,
- What the subject property offers in amenities and updates compared to the competition,
- The state of the local economy,
- Marketing efforts to attract qualified applicants,
- The size and depth of the applicant pool, and
- Government restrictions.
The bottom line is that the market will generally determine the amount of rent and that amount may be higher or lower than what was possible at a previous time.