The key to renting your home to dedicated and happy tenants starts with the right rental price. Whether your rental home is large or small, rustic or tech, tenants will be happiest and provide you both with much-needed stability when the price is right for the space and the local market. In a tight economy like the one we are seeing now, this means both choosing the right rental price and marketing that price so your ideal tenants will see and seek your cozy residential opportunity.
So, if you own an investment home right now, it’s a good time to rent instead of selling because buyers can’t afford today’s mortgage rates. But it’s also a good time to consider the financial needs of your tenants. Housing prices are currently normalizing from sky-high levels, and your most stable tenants will be those for whom the rent is just the right percentage of their income.
Which begs the question: What is a fair rental price in Denver’s housing market?
Fortunately, there are several ways to estimate this that can help you come to a fair yet profitable number for you and your tenants.
How to Determine a Fair Baseline Rent
First, let’s address how to set your initial rent price while advertising for new tenants. Whether you have a new investment property or are between tenants, this is when you want to do your market value calculations. In some states, this is the only time you can determine the rent outside an allowed percentage.
1% of the Home’s Value
One of the industry’s classic standard rules is the 1% rule. Set monthly rent to 1% of the home’s value. If you purchased the home for $250,000, then $2,500 might be an appropriate rent to start with. However, this is only a rough calculation. As you likely know, a fair rent price is also determined by the local costs in your area and what local tenants can afford.
The Average Rent in Your Neighborhood
The next traditional way to gauge your rental price is to look at other rents for homes in your neighborhood. Note the high, low, and mode (most common) rent in the area and determine where your house falls on a scale of high-end to low-end in that context to estimate the rent you should charge.
Remember, never be the highest or lowest rent in the neighborhood. Most tenants prefer to shop in the middle.
One-Third of the Average Income in Your Area
From the human perspective, you can also use local income statistics. Rent should typically be between 1/3 and 1/4 of a tenant’s monthly income. So take your local average salary, and divide by twelve. That’s the average monthly income. Divide that number by 3, then divide the same average monthly income by 4. That will give you a range of what the average local can afford to pay in rent.
How Much Can You Raise the Rent in Today’s Market?
Now, let’s say you have stable tenants and you want to raise the rent by a fair amount. What might that be?
Average Rent Increase
The average rent increase year-on-year is 2-3%. This is similar to the average annual raise because it is meant to adjust for inflation.
When You Need to Make a Big Jump
Sometimes, local rent averages and market values have increased significantly since your tenants move in. If you need to make a significant rent bump, try to limit this to less than 6% per year (double the usual) and if your tenants report that they are struggling, offer a few months to adjust and build up to the new rent.
Remain Aware of State Caps on Rent Increase
Lastly, remember that some states have laws limiting the percentage of the rent you can increase per year while the same tenant continues to renew their lease. You will need to wait between tenants to make a significant increase above this amount.
Denver Investment Real Estate
No one is born knowing everything there is to know about being a great (and legally compliant) landlord. But you can work with a team of professionals who, together, have all the answers. For more real estate tips and tricks to navigate the Denver real estate market, contact us today.