Wednesday, 4 July 2012

Investing in Real Estate: Setting the Rent

This post forms part of my Investing in Real Estate series which has so far covered almost all the aspects involved in buying a real estate property from identifying the property, to deciding how much to pay to negotiating the sale price.  At this point you should have decided to either manage the property yourself or to have a property manager.

There is no set formula for setting the rent for your property though there are a few steps which you should follow and a few golden rules you should not break.  The golden rules are:
  • The rent you charge is totally dependent on what others in the area are charging for similar properties: set it too low and you're losing money, set it too high and you will not get tenants
  • You should weigh the benefits and costs of charging at the higher end of the scale:  while it is always preferable to get a higher rent getting your property rented quickly is much more important from a financial point of view
I have set out a step by step guide to setting your rent below.  The process is always easier if you have decided to employ a property manager because they can advise you on what rent to set.  You do not need to follow their advice blindly.  Make sure you do your own research and make your own decisions
  1. If you have a property manager - find out from them what they believe the rent should be:  Your property manager will be most familiar with the rental market and should be able to give you an appraisal of what you should be able to get for your property.  Always do your own research after this though
  2. Go online and see what other similar properties are on the market for:  The amount of real estate renting websites makes the research very simple.  Type in your property details as a prospective tenant and see what else comes up.  Be objective and try and find properties closest to yours.  If yours is not a premium product dont consider those properties which are. 
  3. Make a list of all the properties and find a rental range.  If the amount that the property manager falls within this range then you know you are looking at the right amount.  If it doesn't then make sure you call them and find out why not (you will also be getting a good idea of how good your property manager is by this point)
  4. Set your rent at the highest point you can where you think it will get rented quickly  If there are a lot of properties similar to yours with much lower rent then yours is never even going to get looked at.  Conversly you do not want to be the lowest price property out there
  5. Once your price is set get your property manager to advertise it and see what type of responses they get.  I did all the above steps and a week after I started advertising the property it was rented to great tenants
  6. If your response is not great in the first week you have probably set your rent too high.  Dont be afraid to drop your rent.  Do the maths of having your property vacant - it is not pretty!  If your property should be on the market for $340 per week but you are holding out for $350, it will take you 35 weeks to make up the rent for every week your property is vacant.  Property contracts are only for one year so you can always renegotiate the price later
If you have any other tips about setting the rent for your investment property I would love to add them in so please comment below.


  1. Investing in commercial real estate property that is the best way to invest in real estate without any risks or difficulties. Commercial property investment is much better than other kind of real estate property because it has provide lots profit making opportunities.

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    1. Hi Hugg,

      Investing in commercial property has different risks and difficulties compared to residential real estate.

      You are exposed in a very tangible way to the business cycle and contractual risk is massive because everything is goverened by the lease agreements which are much more complex than an ordinary residential lease

      It does have its upsides though including much better yields.