One of the most common questions we get from owners is how much rental income they can expect to receive from their property.
Oftentimes, I’ll ask for the address so that I can provide a rental estimate, and the owner will be surprised. “Don’t you need to see the property first?” They’ll say.
They’ll often go into great detail about specific features of their home—The big window in the living room! The new countertops in the kitchen! The high-efficiency washer and dryer!—and wonder how each will impact the rental price.
But the honest answer is that in most cases, you can put together a fairly accurate rental estimate based on the address alone.
For most properties, there are only two factors that really affect the rental rate: location and size.
(Note: this analysis applies primarily to affordable, single-family or Duplex housing like the kind found in most Michigan markets. In higher-end apartments or condos, amenities and fancy features can make a bigger difference.)
Generally speaking, at least 85% of a property’s rental rate comes down to just size and location. For example, take this map of current listings for three-bedroom houses near the intersection of I-96 and M-39:
There’s a difference of just $150 between the cheapest house and the most expensive house in this area. Much of that $150 likely comes down to size: although they’re both three-bedrooms, the $650 house all the way on the left is 770 square feet, while the $800 listing all the way on the right is 850 square feet.
While the condition of a property does make a difference in rental rates, it primarily does so at the margins. Prospective tenants tend to mentally bucket a home into one of three categories: great, good, or bad.
A really nice property—say, one with a brand new kitchen—will often rent for a bit above what you’d estimate based on location and size alone, and a property in really poor condition will rent for less, or fail to rent at all. But we’re typically talking about a 10% boost at most. Owners sometimes imagine that they’d be able to get hundreds more a month if they repaint or install new appliances, but the vast majority of the time that’s simply not the case.
So while it’s tempting to imagine each home as a special butterfly, with each of its unique features assessed in detail, the truth of the matter is that estimating rental rates is more science that art. Get the address and square footage, and you’re almost all the way there.