A lot of people struggle with how to calculate rent for their investment properties. This is especially challenging if you’re investing out of state in a market you aren’t super familiar with.
And it doesn’t help that this is high stakes.
Make overly optimistic rental rate assumptions and you run the risk of throwing off your entire investment.
While caution is encouraged, a lot of people will recognize the risk and go too far in the opposite direction.
The result?
They pass on a lot of great deals because they don’t truly understand how to calculate rent for their target property.
The good news is we live in an age where there’s an abundance of information and online tools.
While I heavily rely on my own market knowledge for calculating rents, I’ll show you exactly how I verify my assumptions in this post.
Here are the tools, strategies, and methodology I personally use when calculating rents in any market.
Getting A Baseline With Rentometer
I’m not a big fan of Rentometer, but I know a lot of people heavily rely on it.
And I get it. It take about 2 second to throw in an address and have it spit out some rental numbers like this:
It’s actually not terrible. And I can say that because I have a lot of Detroit market knowledge and even more in this specific area.
But it’s important to understand where your house might fall on this spectrum.
For example, if the finishes are higher end you may be able to shoot for $1,500/month. But if it’s simply an average rehab you’ll likely be more in the $1,200 – $1,300 range.
But I don’t simply rely on Rentometer’s recommendation. I like to verify with at least one other source.
Verifying Market Rate Rents With Zillow
Zillow is probably the top rental listing platform there is. I always list my vacancies there, and most everyone else I know does the same.
And they have a ton of rental data available for free.
You can look this data up for any city, but you can also drill down to a specific zip code, property type, and bedroom count.
Using our same subject property from Rentometer we get the following data when looking at 3 bedroom homes in the 48224 zip code:
There’s more data here that’s available than Rentometer’s free lookup, but we’re also dealing with a larger area.
Rentometer seemed to drill down on the specific pocket the home is located in, but Zillow is only giving us zip code-wide data.
Still, there’s some clear overlap. Most homes in this area are renting for $1,100 – $1,300 per month.
But that’s a wide range.
A swing of $200 at these price points could make or break a deal. So we need to drill down and get a true understanding of what our home will actually rent for.
Validating With Actual Rental Comps
To get granular and be confident in a rental price for our investment property I like to manually look at the rental activity in the immediate area.
For this, I simply plug the subject property into Zillow and filter for rentals right around that area.
There are 29 rentals on this map but I’m much more interested in the 11 in the red circle I drew on the photo.
The listing that sticks out the most to me is the one for $950.
Hopefully it sticks out to you as well because it’s priced $150 lower than anything else on the map, let alone our circle of interest.
Looking at the home, there’s nothing overly negative that sticks out. It appears a bit dated, but overall clean and livable.
That doesn’t mean there isn’t something “wrong” with it. There still could be. Maybe the photos aren’t current and it’s actually a dump.
Who knows! But we need to work with the information we have access to.
Demand, howver, can’t be faked. And we can see there’s a TON of it for this home:
If a property is listed for 6 days and you receive 241 contacts and 37 applications that’s some major signal.
What this tells me is simple… This home is under priced!
I took a look through the old listing history and it appears the home last sold for $13,000 in 2009. It was rented a handful of times since then but never sold.
So it could simply be an owner that has very little invested and either doesn’t care that they are well below market or uses it as a strategy to find exceptional tenants.
Regardless, we can throw this one out as it’s clearly an outlier.
And here’s another example of a home that I believe is under priced:
But this one is likely under priced for a different reason.
It’s a nicely updated and attractive home. With 111 contacts in 20 days, it’s clear that this house could be fetching $1,250 or $1,300 per month.
I would sift through each of the 11 homes in my circle of interest and look at these details. You could even put together a spreadsheet with prices, days listed, contacts, and rehab quality.
I guarantee you’ll see some clear patterns and start feeling more confident about a rental price.
It’s Better To Be Realistic With Rents
If you have an average house there’s no sense in trying to push for above average rental amounts.
I know the temptation to get more than you were hoping for is real, but you also want to make sure you can attract the best tenant possible.
For example, the first home we looked at on Zillow (11501 Rossiter) is probably slightly below average. I would feel confident listing that at $1,100 which is also a below average rental amount for the area.
Could you get $1,200 for it? Potentially.
Would you be sacrificing tenant quality? Most likely.
The logic here is if I’m a prospective tenant that can afford $1,200/month and I’m extremely well qualified, chances are I’m applying to the property on Worden instead.
The Worden rejects would likely be the ones applying to Rossiter. Why not be willing to accept $1,100 and open yourself up to a larger pool of potential tenants so you can find a stronger fit?
That said, if you have a home that’s above average in any way, it might be worth testing the waters at a higher than average rental amount.
For example, the second property on Worden is one where I’d probably try listing for $1,300/month. But I’d also be willing to slash it down to $1,200 within a few days if I wasn’t seeing much traction.
And that’s super important.
It’s fine to push for higher rents if you have an above average rental, but be willing to adjust quickly and be sure you are running your numbers at the average rental amount.
That way, if you don’t get the higher rent your numbers still work just fine.
And if you end up getting higher rent than you planned for the deal just got that much better!