A Little Mistake That Could Cost You Your Rental Home
Sunday, February 8th, 2009Most people searching the Internet under the phrase how to rent out my house want to know how much they should charge in monthly rent.
A big mistake that owners make when they first rent out their home is that they don’t give enough thought as to what to set the monthly rent at. Set it too high, and your home will be vacant for too long and you won’t be able to pay the monthly mortgage. Set it too low and you won’t be able to pay for maintenance on the home or the monthly mortgage.
Whether too high or too low, you are screwed!
Statistics show that most owners over value their rental home and therefore set the monthly rent too high.
How To Calculate The Perfect Monthly Rent For Your Rental Home
The first thing you need to do is to figure out your costs of owning and operating your rental home. Estimate costs for your mortgage, insurance, taxes, and maintenance.
If your annual expenses on your rental home are $8,000 for the mortgage and tax payments and $3,000 for annual operating expenses plus you want a 10% annual return ($5,000) on your original investment of $50,000 cash to buy the home, you need to generate rental income of $16,000 per year or about $1,350 per month. Next, allow for your home to be vacant for one month a year. It will take you time to get your rental ready, and to find another tenant. So that bumps up the monthly rent to $1,500 per month.
Always use a conservative budget that anticipates rental income at $50 to $100 per month below the fair market value of rentals in the area.
How To Determine The Fair Market Value Of Rentals In Your Area
Next, you need to determine the fair market value of rentals in the area. If the market will only support $1,200 per month for your 2 bedroom, 2 bathroom home, then you will need to give a little on your 10% annual return until the fair market value of rentals in your area rise a little.
To determine the fair market value of rentals in your area by conducting a market survey. The best way to do this is to look in your local newspaper, on Craigslist, and drive through the area and look for “Home For Rent” signs. Write down all the numbers of owners and property management companies who are managing the home that you find in these publications and by doing a drive by. Call each number and pose as a prospective renter. Ask about the square footage of the home, the number of bedrooms and bathrooms, and anything else that your home also has. Ask how much they want in monthly rent and a security deposit. Tell them thank you and that you have to talk it over with your spouse and will call them back. Presto. You now know what other owners in your area are asking for rent.