How to Determine Reasonable Rent for Your New Property

One of the biggest challenges property owners wrestle with is figuring out how to properly price a new rental property. Determining a fair and reasonable amount to charge for rent is important as it directly impacts marketability, tenant turnover, and your overall return on investment.

But coming up with an actual rent amount is easier said than done. The process can be a bit of a balancing act. If you set your rent too low, it could impact your cash flow. On the other hand, setting your rent too high could inhibit your pool of rents, leaving you prone to vacancies.

In reality, there are a myriad of factors to consider when coming up with a fair rental price, regardless of if your property is in Alberta or Ontario.

Whether you are looking at purchasing a new investment or have already acquired a new rental, here are the steps you should take to make sure your rental property is priced appropriately.

1. Research Local Rent Prices and Trends

Understanding your local market is the first step to pricing rent for your new property correctly. It’s important to understand how different properties and features impact price offerings. Similarly, once you know what your competition is charging, you can set a price commensurate with market standards.

Start by researching online what average rents go for in your area. In Ontario, recent data indicates the average nine hundred square foot apartment rents for $2,364, with some variability depending on the type of unit and amenities offered.1

One bedroom, two bedroom, and three-bedroom apartments often go for $2,070-2,850.2 Compared to the previous year, rents showed an increase between 7-14%.2 Standard houses have also been known to go for far more.

Once you have a better idea of what rents are charged in your area from a macro level, start to narrow in on rent pricing trends for your specific neighborhood.

For example, if you are a Windsor investor, you might have noticed that the far east and south sides charge significantly higher rents than downtown. Also note properties undergoing massive overhauls and renovations typically demand higher rents, which is becoming more common on the west end.

2. Identify Any Applicable Rent Control Laws

While you are completing key market research, it’s also a good idea to identify any applicable rent control laws that govern your area. Rent control refers to government programs that set limits for how much you can charge in rent for a given property.

One example of rent control is setting rent price increase caps. With people still working to recover from the effects of the COVID-19 pandemic, governments continue to enforce programs to help with consumer affordability.

In Ontario, rent increases are capped at 1.2% for 2022 unless you are granted approval to charge more by the Landlord and Tenant Board.3 Make sure to factor any pricing restrictions into your decisions before setting your final price.

3. Consider Local Market Demand

Market demand is always something you need to weigh when pricing rent for your new property. Typically, when the economy takes a downturn or mortgage interest rates go up, fewer people can afford to buy a new home. These same people turn to renting which drives up demand allowing rates to go up.

But macroeconomic conditions are not the only market driver to consider. Local seasonality could also be a factor. For example, if you own a rental near a university, you may find demand exploding right before the school year begins.

Despite increasing homeownership rates across Canada, in Ontario non-homeowners ages 18-54 continue to outpace homeowners by a drastic amount which.4 This means rental demand continues to remain strong in the area despite any economic headwinds.

4. Factor Additional Costs into Your Pricing

Knowing and understanding the average rents charged in your market is good, but there are also additional factors you should also factor into your rental price. You got into the rental business to earn a return on your investment. Factoring in implicit costs is essential to ensuring the rents you charge net you money after all is said and done.

If you are smart, you want to make sure the rents you charge, at minimum cover any outstanding mortgage payment you may have. Not only should it cover your principal and interest payment, but also any property taxes, insurance, and association fees (where applicable).

Other costs to factor into your pricing is a buffer for maintenance related items. Properties can deteriorate over time and if you don’t factor these costs into your rental price, you could end up wasting any return on investment paying to cure expensive repairs.

Lastly, consider any property management fees if you are utilizing a property management company to oversee the day-to-day management of your property. If you are not utilizing a property management firm, make sure to consider tenant related screening costs into your price calculation.

5. Set Your Rental Price

After doing extensive research, factoring in competition, market demand, and all other applicable costs, you should be able to comfortably land on a reasonable rent price for your property.

Even if you feel like you are undercutting what you can charge, keep in mind rent’s charges can be fine-tuned over time. It is permissible to adjust rent at certain times and with proper notice.

It’s important to understand that market conditions can change over time so some changes should be expected. However, with the right process and tools, you will be able to pivot seamlessly so that you always are charging reasonable rent for your new property.

Sources

1 RentCafe. (2022, April). Average Rent in Ontario & Rent Prices by Neighborhood – RentCafe. Retrieved May 9, 2022, from https://www.rentcafe.com/average-rent-market-trends/us/ca/ontario/

2 Zumper. (2022, May 9). Average Rent in Ontario, CA and Cost Information – Zumper. Zumper – Apartments for Rent & Houses. Retrieved May 9, 2022, from https://www.zumper.com/rent-research/ontario-ca

3 Ministry of Municipal Affairs and Housing. (2021, December 31). Residential rent increases. Ontario.Ca. Retrieved May 9, 2022, from https://www.ontario.ca/page/residential-rent-increases

4 RE/MAX Canada. (2021, November 4). Home Ownership Rates in the Canadian Real Estate Market. Retrieved May 9, 2022, from https://blog.remax.ca/home-ownership-rates-in-the-canadian-real-estate-market/

Marla Coffin
Marla Coffin