How Much to Charge for Rent

Profitability in rental property investing is driven by three main factors: 1) the property price, 2) the rental income, and 3) the rental expenses. That’s why figuring out how much exactly you should charge for rent is crucial.

This holds true for both long term and short term rental property investments. In the first case, rental rates are calculated and paid on a monthly basis, and in the second—on a daily/nightly basis.

If you charge too much, you risk having a vacancy that’s too high, while you still need to spend money on maintaining your income property, which will result in negative cash flow. If, alternatively, you charge too little, you’ll be leaving money on the table, so your cash on cash (CoC) return and cap rate will be suboptimal.

This renders the big question:?What’s the best way to decide what kind of rent you should charge for your investment property?

In this article, we will look at three different—traditional—ways to calculate rent for both traditional and vacation rentals. We will go over the advantages and disadvantages of each method.

Then, we will look at how using a?rental rate calculator?can help boost our decision-making process and—ultimately—the ROI of our property. We will also discuss why Mashvisor has the best rental income calculator in the US housing market 2023.

3 Methods to Calculate Rental Fee

The rental fee—or rental rate—is how much a landlord or an Airbnb host charges tenants or guests to occupy their property for a month or a day, respectively. For long term rentals, the rental fee is equivalent to the monthly rental income. With short term rental properties, on the other hand, the monthly rental income is the product of the daily fee and the occupancy rate.

The importance of setting up the right rental fee for your investment property is based on the fact that it is present in all formulas for return on investment in real estate. No matter if you use the cash on cash return metric or the cap rate measure, the rental rate is in the formula.

As a beginner investor, you’re probably wondering, “How can I decide?how much can I rent my house for?to optimize profitability?”

Let’s go over the three most common methods to estimate the rental rate that you should charge for your investment property:

1. Using the 1% Rule in Real Estate to Estimate Rental Rate

One of the most widely used ways to calculate a rental fee is by using what is called the 1% Rule in real estate investing.

What Is the 1% Rule?

The 1% Rule is a basic rule in real estate investments, according to which an investor should set the rental rate to be equivalent to 1% of the purchase price of the rental property. It refers to the rental income per month.

Some experts say that the realistic range is actually between 0.8% and 1.2%, with some even going as high as 2%. But charging rent equal to 1% of the property sale value is usually enough to cover the recurring expenses and secure positive cash flow.

The beauty of the 1% Rule in real estate is the simplicity of the formula and the calculation.

What Is the Formula to Calculate Rental Rate Using the 1% Rule?

Using the 1% Rule, here’s how to calculate the rental rate:

Rental Fee = 1% x Property Purchase Price

Applying this rule of thumb to investing in long term rental properties is easy. All you have to do is to calculate 1% of the home value, and this should be the rental rate per month. If your?rental market analysis?shows substantial vacancy rates in your area, you’ll need to factor potential vacancies into your calculation.

For example, let’s say you buy an income property for $200,000, and you expect a 10% vacancy rate. The rental fee that you charge renters should be equal to 1.1 x 0.01 x $200,000 = $2,200. The extra $200 per month is needed to compensate for potential vacancies while still getting a good rate of return.

Calculating the rental rate of short term rentals using the 1% Rule is a bit more complicated, though. It’s because the?Airbnb occupancy rate?is not a single number but fluctuates from week to week and from month to month. So, you will need to find a reliable estimate of the expected short term rental occupancy rate before being able to make use of the rule.

Once you have the estimated occupancy, things are straightforward. Let’s say you purchase a vacation rental that costs $300,000, and the local occupancy rate is 60%. This means a vacancy rate of 40%. You should aim for monthly rental income not account for vacancy of 0.01 x $300,000 = $3,000. Then your Airbnb daily rate should be $3,000/30 days = $100/day.

If we factor in a vacancy rate of 40%, the nightly rent becomes 1.4 x $100 = $140/night.

Pros of the 1% Rule

This method of calculating rental fees has a few important benefits, including:

• Simple: The best thing about the 1% rule in real estate is that it is extremely easy and straightforward to calculate. Unlike other approaches and formulas, it doesn’t require inputs that are hard to come by. All that landlords or Airbnb hosts need is the property purchase price.
• Proven: Real estate investors have been using this rule for many years, and it’s proven its value in the world of rental property investing.

Cons of the 1% Rule

Like any other strategy in real estate investments, the 1% Rule has some shortcomings, which include:

• Overly simplistic: While it is definitely simple, this method is actually overly simplistic. It’s too naive to consider that profit is purely based on how much you buy your rental property for.
• Inflexible: The 1% Rule doesn’t consider factors like local rental expenses and?tax rates, local demand, comparative rental rates, rental strategy, and financing method. Each of these has a major impact on ROI (cap rate and CoC return) in real estate. For instance, managing a long term rental costs much less than owning a short term rental.
• Outdated: This rule does not take into account the fact that things change over time. If you bought your property a few years ago, it’s likely that rental expenses (and maybe even tax rates) have increased significantly since then. It means that 1% of the purchase price might no longer be enough to cover monthly costs and run a profit.

2. Using Rental Comps to Calculate Rental Fees

The second way to evaluate how much rent to charge for your investment property is with the help of rental comps.

What Are Rental Comps?

Rental comparables—or?rental comps—refer to comparable rental properties in the same area where your income property is located. Comparable means that these existing rental listings have the same or very similar size (square footage and floors), features, finishings, and amenities.

For example, let’s say you own a 2,500 square foot single family home that was built in 1980 and has a veranda and a swimming pool. It doesn’t make sense to use a nearby 1,800 square foot apartment built in 2010 with no access to a swimming pool to decide on your rental rate.

How Is Rental Property Value Calculated Using Rental Comps?

Once you find a few rental properties that are comparable to yours, you should see what rent they ask for. Of course, these rentals have to be occupied; if they are vacant, it’s very likely that the fee they are trying to charge is too high.

Then, you should account for any small differences between your rental property and these rentals to adjust your rental rate to the best possible value.

All this sounds great, but it prompts a major question:

Where Can You Find Rental Comps?

Rental comps can be located in a few different ways:

Traditional Way

Traditionally, real estate investors used a few approaches to finding rental comps.

One way to do that is to resort to your?network of fellow investors. It’s important to build and maintain a solid real estate network of investors. They include people investing in different property types and different rental strategies in the local market or the market where your own investment properties are located.

You can ask around to see what rental fee they are able to charge for properties similar to yours. To reap success with this approach, you have to make sure that you maintain relationships with those who invest in similar rentals in the same location as you.

Another way to find rental comps is to look through?rental listings in local newspapers. You should try to locate a few properties that are similar to your rental property and see what rents they are asking for. The trick is to focus on homes that get rented out quickly. If they stay on the market for too long, chances are that they are asking for rates that are too high for the market.

Yet another method to figure out the local rental rates is to?talk to renters?rather than landlords. If you know people who are renting in your neighborhood, you can check out how much they pay for rent. While this will work for long term rentals, it is not really feasible for short term rental properties. You can’t just go around asking tourists how much they pay for their Airbnb.

Present-Day Way

Last but not least, you can check out?rental websites?and search for comparable long term or short term rentals in your location. With the advancement of technology in real estate investing, that’s arguably the most efficient way to find rental comps and calculate your rental fee.

The question that remains, though, is where to find reliable rental listing websites. In other words, how do you know if you can trust the real estate data as well as the long term and?short term rental data?provided by a certain website?

We will get into it shortly. For now, we’ll just mention that it implies using the best rental rate calculator on the market.

Related:?The Top 5 Real Estate Investing Websites for Making Money

Pros of Rental Comps

The advantages of using rental comps to find out the rental rate include:

• Reflective of local market conditions: Rental comps consider local factors like rental supply and demand, taxes, operating costs, seasonality, etc. If other investors can charge such fees and generate a good return on investment, you should be able to do the same.
• Up to date: How much comparable properties charge for rent reflects the current market. Using rental comps, you can update your rental fee as needed. Of course, you must consider local?rent control?policies with traditional rentals.
• Applicable to short term and long term rental properties: With rental comps, you can calculate the right rental rate for both rental strategies in the same way.

Cons of Rental Comps

Meanwhile, the main drawbacks of basing your rental fee decisions on rental comps include the following:

• Time-consuming: Finding reliable rental comps can take a lot of time. Unless you have proven sources of traditional and?Airbnb rental data, you might need to spend weeks locating comps and learning how much they charge for rent.
• Dependent on the quality of the data source: Your rent estimate when using rental comps will be only as good as the quality of the data sources that you’ve used. So, having access to accurate rental data is key.

To calculate rental fees, you can use rental comps, which refer to comparable rental properties in the same area as your income property.

3. Using Rent Zestimate to Find Rental Income

The last method that real estate investors have traditionally used to set up the rental rate of their investment property is relying on the Rent?Zestimate. Many beginners think that Zestimate refers only to the current market value of a home. However, there is also the Rent Zestimate, which is related to the rental rate of a property.

What Is Rent Zestimate?

The Rent Zestimate is a value provided by Zillow which estimates the rental fee a landlord should charge for their income property. It is supposed to be based on the performance of similar rentals in the area, which means that it should be accurate and reliable.

However,?online Zillow reviews?highlight the inaccuracy of the Rent Zestimate, so investors cannot really rely on this metric alone when deciding how much to charge for rent.

Related:?How Does Zillow Estimate Rent? The Complete Guide for Real Estate Investors

Pros of the Rent Zestimate

Utilizing the Rent Zestimate to evaluate rental rates has one main advantage:

• Readily available: The Rent Zestimate gives real estate investors quick and easy access to the rental fee they should charge for their income property. It’s equivalent to getting immediate access to rental comps data.

Cons of the Rent Zestimate

The cons of setting rent with the help of this metric are:

• Inaccurate: A major concern is that many landlords find Zillow’s estimates of local rental rates to be inaccurate. If you base your decision on how much to charge for rent on a single inaccurate number, your cash flow and overall return will be compromised.
• Inapplicable to short term rentals: While the Rent Zestimate might sometimes work for traditional rentals, it cannot be used for calculating the rental rate on short term rentals. As?vacation homes for sale?bring significantly higher cap rates and CoC returns than their long term counterparts, investors will be missing out on major opportunities.

What Is the Most Efficient Way to Calculate How Much to Charge for Rent?

The most efficient way to calculate how much to charge for rent is using a rental rate calculator.

What Is a Rental Rate Calculator?

A rental rate calculator is one of the must-have?real estate investment tools?in 2023. This is a variation of the investment property calculator, also known as the?rental property calculator.

The rental rate calculator is an online real estate investing app that helps investors set up the right rental fee for their income property.

A good?rental analysis calculator?should use big data from multiple, proven, trustworthy sources and cover the entire US real estate market. It should use AI and machine learning algorithms to analyze this data and produce high-quality rental analytics. Moreover, the best rental income calculator should work with both short term and long term rentals.

What Is the Best Rental Income Calculator in 2023?

You can find the top rental rate calculator for 2023 right here on Mashvisor. The Mashvisor?real estate investing app?comes with an in-built calculator that helps investors figure out the optimal rate to charge for their traditional and Airbnb rental properties.

Indeed, Mashvisor features a comprehensive?real estate investment ROI calculator?that provides more metrics than the rental rate.

What Data Do You Get With the Mashvisor Calculator?

Here are the real estate metrics to which you get immediate access with the Mashvisor?investment property calculator:

• Property price: This includes both the listing price and the Redfin valuation.
• One-time startup costs: Home inspections, repair costs, furniture, appliances, and closing costs are all factored in.
• Comparable rental income: This is the monthly rental income that investors are able to generate for similar properties in the same market.
• Recurring monthly expenses: These costs include insurance, utilities, property management, maintenance, property tax, HOA dues, rental income tax, and cleaning fees.
• Occupancy rate: This shows the proportion of time a property is rented.
• Cash flow: This is calculated as the difference between gross rental income and rental expenses.
• Cash on cash return: This is the most comprehensive measure of return on investment in real estate investing, taking into consideration the method of financing.
• Cap rate: This is one of the easiest ways to calculate returns in rental property investing.
• Financing metrics: This section differentiates between paying for your property in cash vs mortgage. The measures include the down payment, mortgage type, loan term, and interest rate.
• Investment payback balance: This shows you how long it will take to break even on your property.

When searching for investment properties for sale on Mashvisor, each listing comes with readily available rental property analysis. It consists of all the data and analytics listed above, including the rental fee.

Furthermore, in case the property is not listed on Mashvisor, you can enter its address to get access to the same level of analysis. It means that you can find the best rental rate for any residential property in the US market quickly and efficiently.

Related:?The Beginner’s Guide to Rental Property Analysis

With Mashvisor’s investment property calculator, you can access important real estate metrics.

Why Is Mashvisor the #1 Rental Rate Calculator?

Calculating rental rates with the help of Mashvisor provides the following benefits:

• Accurate: The estimated rental fee is based on the performance of actual rental comps in the local market and reflects both historical and current data. All numbers are constantly updated to show the most up-to-date?investment property analysis.
• Reliable: The platform gathers real estate and rental data from reliable sources, such as the MLS, Redfin, RentJungle, Airbnb, public records, and tax sources, and covers the entire US market. The data is organized, cleaned, analyzed, and computed by Mashvisor’s AI and machine learning algorithms.
• Available for all markets: Mashvisor offers nationwide real estate market coverage, including the largest cities and the smallest towns.
• Applicable to both rental strategies: The platform provides the same level of analysis for both short term and long term rental properties. All numbers are shown side by side, so investors know how much they can charge for rent in case they ever decide to switch their rental strategy.
• Easy to access: To find out what rent to charge, just click on one of the listings available on Mashvisor or enter the address of your property. You get access to the comparable rental income of the property you’re analyzing with a few clicks of a button.
• Able to find investment opportunities: Mashvisor allows you not only to analyze specific properties but also to search for profitable rental properties for sale. You simply enter your criteria, and the?investment property search?engine will show you a list of properties meeting your criteria. For each, you get a rental rate estimate.
• Efficient: All in all, Mashvisor has turned three months of research into 15 minutes.

Find out more about how Mashvisor’s rental rate calculator can help you.?Click here?to sign up for a 7-day free trial.

Final Words on Rental Rate Calculations

Like many other things in real estate investing, calculating how much to charge for rent for a house used to be complicated and time-consuming. However, tech advancements have made the process much easier and faster for both beginner and experienced real estate investors.

Namely, the development of the rental rate calculator allows landlords and Airbnb hosts to decide what rent to ask for within minutes. It eliminates the need for manual data collection, analysis, and complex calculations.

And if you’re searching for the best rental income calculator in the US market, this is Mashvisor for all the reasons listed above. Most importantly, Mashvisor uses data from multiple proven sources before applying algorithms powered by AI. In addition, it covers all US markets and both rental strategies.

Furthermore, it doesn’t limit its analysis to rental fees only but also provides estimates of all crucial real estate metrics like cash flow, cash on cash return, and cap rate. Last but not least, the platform is very intuitive and easy to use.