When analyzing a real estate investment, there are many financial variables to take into account in order to be successful. One of the most important questions to answer regarding any rental property is what the appropriate rent amount is.
Charging too much for rent in a particular unit can result in increased losses from vacancy while charging too little for a property will result in diminished income and lower your ROI.
There are several things to consider to be sure that you’re setting an accurate price point for your rental investment property here in Chicago.
The One-Percent Rule as a Starting Point
While there is no silver-bullet formula for determining exactly the right price for renting your property, many people begin with a useful method called the “one-percent” rule.
This rule of thumb is that you should plan to rent your property for 1% of the gross value of the property. So, according to this rule, you should rent a $200,000 property for about $2,000.
However, as we have pointed out elsewhere on this blog, the one-percent approach is only a good rule of thumb about where to start. The 1% rule should be used at a macro level to analyze certain markets or neighborhoods that you may not be familiar with. After applying this method, you will need to dive deep with the market approach (below) and adjust your rental price based on the unique features of your property.
Also, be sure to calculate the 1% based on the current value rating of your property, rather than simply based on what you actually paid. Property tends to appreciate over time and calculating based on what the value of a property happened to be at the time you acquired it could needlessly decrease your ROI.
The Market Approach
Rental properties are subject to the same market forces as almost any other business. Making sure that your rental rate is appropriately competitive is essential in setting the right price for an investment property.
In order to make sure that your price is appropriate for the area, research similar properties in that particular part of the city or neighborhood. Looking at properties in the same area as yours will ensure that you’re comparing your rental price against properties with similar local amenities, school districts, neighborhood crime rates, and property taxes and values.
Your rental price should be competitive in order to attract tenants but should also be high enough to reflect the value of the area of Chicago that your rental property occupies.
The market approach is what real estate brokers do by running a comparative market analysis on the Multiple Listing Service (MLS). You can do this too by checking all of the online rental websites, such as Zillow, Trulia, Apartments.com, etc. From here you’ll be able to find comparable properties in the same vicinity of your property. Make sure that when you’re selecting your comps that they have the same number of beds/bath, they’re the same type of property (apartment vs single family home), they have the same level of finish, etc. The closer you can get to your property, the better! Once you’ve found 3-5 close matches, you should have a good rental range that will help guide you on what you should be charging.
Consider Factors About Your Property
When using the methods discussed above, you are ultimately trying to set the right price for your property. In other words, you should fine-tune your rental price based on the amenities and features that your specific property offers your tenants.
You should take the following into consideration, when fine-tuning your rent price point:
- Number of bedrooms and bathrooms
- Layout
- Level of finish
- Amenities (in the unit, in the building [if applicable], and in the neighborhood)
- Size in square footage
- Length of your lease
- Seasonal demand
- Pet policies and fees
- Market trends
- Walkability
- Proximity (eg. to public transit, central business district, lake, etc)
Also, while there are currently no rent control regulations in Chicago, you should always be aware of any laws or statutes that could influence the rental price for your investment property.
For a free rental analysis and exceptional property management services, contact Landmark Property Management online or call today at 312-313-8553.
