How to set the perfect rent price?
Updated: Jan 1, 2021
Prior to purchasing your property its important that we spend a significant amount of time looking at the market rent rates in the area of interest. This will then be used to calculate our cash flow from the different deals we are going to observe.
As a starting point – you should have a pretty good idea of what a 1, 2, and 3-bedroom unit rent for in the city you’re looking to make the purchase. I would then start looking more in depth at each specific neighborhood – you will see that they too will have some differences in rent prices. Typically, proximity to the downtown core, access to transportation, schools and crime rates will have the biggest impact on overall rent prices. There are many other contributing factors, but we will save this for another blog.
So, where do we start? First familiarize yourself with the city. I would first identify the downtown core and work outwards. Is there any regional transportation? In the GTHA (Greater Toronto Hamilton Area) if you’re near a GO train station - you’ve struck gold. Does your city have good inner-city transportation? If so, identify where the express routes are located. Good examples of this would be BRT and LRT routes. For schools – there’s a good resource available online published by the Fraser Institute. Every year they provide rankings based on academic performance. For crime rates – you can simply look up regional police reports. A lot of them are interactive and can provide a map with different types of crimes.
Once you’re familiar with the city I would recommend that you spend some time looking at the rental market online. You can use Facebook Marketplace, Zumper, and Kijiji to name a few. Try to look for rental properties that will mimic what you expect to have on the market once you purchase your investment. We want to make sure that we only look at comparable properties. Look beyond just comparing bedroom #s. For example, if you will be renting out a basement unit – then you should compare only to basement apartments. We want to make sure that we are looking at comparable finishes, area, bedroom #, type of dwelling, and other features (utilities/backyard access/in unit laundry/etc). Its also true what they say – some pictures are deceiving. I would highly recommend that you visit a couple of these places and pretend to be a renter. Ask key questions regarding the unit like “What is included in the rental price?” or “Why is the current tenant moving out?”.
Like real estate sales, the rental market has seasonality as well. Usually November to February are the slow months and you will find that rental prices and demand might take a bit of a dip. Another factor that might play a big role in low rental prices is the supply/demand in the marketplace. Always look for the vacancy rates in the market you’re looking to invest. Hint: CMHC posts this information by city. Lower than 5% is gold – this shows a lot demand and limited supply in the market. Also keep your eye out on the 4 stages of rental market cycles: Recovery, Expansion, Oversupply, and Recession. Which stage is your market in?
Our recommendation: Try to price your unit 10% lower than average rents. This will keep your vacancy at a minimum. In most cases, having a vacant apartment for an additional 2-3 months is not worth the additional increase in rent.
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The information provided in this blog is for entertainment purposes only and is not intended to be a source of advice with respect to the material presented. The information contained in this blog do not represent legal or financial advice and should never be used without first consulting with a financial professional to determine what is in your best interest to meet your individual needs.
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