Charging Rent for Multifamily Property
Deciding on what rent to charge for a multifamily property is vital to an owner’s overall success in the market. The chosen rent will determine the type of tenants attracted to the property and if the owner will ultimately make a profit. So, read more to ensure you are pricing your multifamily units correctly.
Create a Rental Market Assessment
A rental market analysis includes several components:
- The current state of the market
- Neighborhood characteristics
- Number of bedrooms and bathrooms
- Property floor plan and square footage
- Age of construction
- Comparable rents throughout the area
Understanding the current state of the market is essential when deciding on your multifamily property’s rent. Precarious markets come and go, and real estate fundamentals are ever-changing. The key is to stay up to date on market indicators to make the best decision possible. Seasonality will also impact the rent that can be charged.
Take into account the local neighborhood’s median income while choosing your property’s rent. The average income in the area will determine how rapidly spaces will fill up in your multifamily property. With the right rental price that reflects well based on the surrounding area, the tenants will be able to afford the rent, and you will not have to worry whether you’ll be paid on time. In short, your rental pricing should be tailored to attract potential tenants with comparable salaries.
The date of construction determines the style of the multifamily property and whether the owner will need to renovate soon. Some renters may not want to live in an old building and will be less likely to pay a higher rent.
Comparable rents are helpful to see what your competitors are charging for their multifamily units. You want to ensure that your rents are competitive and attract a decent number of renters. Charge too high, and people cannot afford the unit. Charge too low, and you miss out on a high percentage of profits. Depending on your property’s location, finding the ideal medium can go a long way for any multifamily owner.
Evaluate the Property’s Amenities
After completing the rental market assessment, it is time to adjust rent up or down for certain amenities. Typical elements and amenities that have an impact on the monthly rent include:
- Layout, such as open space vs. a floor plan divided into numerous small rooms
- On-site washer and dryer
- Swimming pool
- Balcony
- Air conditioning
- Dishwasher
- View from the property
- Single-story vs. multi-story
- Amount of closet and storage space
- Parking available
- Fitness center or recreational facilities
- Gated community
Identify Property Operating Expenses
When deciding on the monthly rent, ensure you will generate enough cash to afford your monthly property expenses. Owning a multifamily property means you will be in charge of paying the monthly mortgage payment, maintenance and repairs, sewage and garbage, and any emergency expenses. If the rent does not generate enough profit to cover the property’s fees, the owner will have a more challenging time breaking even.
How to Determine the Value of Your Multifamily Property
The income method appraisal, which uses a straightforward formula for valuing commercial real estate, accounts for a major portion of the value of commercial multifamily real estate:
Capitalization Rate / Net Operating Income = Current Market Value
It is customary for owners to charge renters a percentage of their property’s overall value. A well-known equation to use is:
Purchase Price of Property X Percentage of Property Value = Rental Price
Several multifamily owners go by the rule that the monthly rent must equal one to two percent of the property’s value. However, keep in mind this rule is only a suggestion. This is only a rough approximation of your future rent. Not a replacement for looking up nearby comparable apartments and comparing the rents charged.
