Friday, November 13

How Much Should I Charge for Rent?

That's a question I used to dwell over. Like with many things, I prefer to keep this as simple as possible. Obviously I want to charge the highest amount the market will bear, but I also need to know if this amount would be profitable when I look for new properties.

There are two metrics I use:
  • Rent as a Percentage of Home Value
  • Cap Rate
Rent as a Percentage of Home Value

This is an easy calculation. I've decided that if I can charge 1% of the home's value per month, I will more than likely make a profit. For the $58,000 townhouse I have just rented, I need to charge $580 per month. This figure leaves room for short vacancies, normal repairs, interest on debt, taxes, insurance and, most importantly, profit. By the way, I am actually charging $625 per month, so another $45 or so falls right to my bottom line.

Cap Rate

This is the measurement most often used by lenders, appraisers and investors. It is more complicated, but not too difficult, as the math is basically the same as above. With cap rate, you take your net income and divide it by the market value of the property, times 100. If your net income is $10,000 on a $100,000 home, you have a cap rate of 10. I have read that any cap rate above a 7 is good for owners and anything less is good for tenants. This calculation is more complicated because you have to figure net income by accounting for a variety of things including vacancy amount and operating expenses, which include advertising, insurance, maintenance, property taxes, property management fees, repairs, supplies, utilities, etc.

As with many things, I am a simpleton. There are far too many paper pushers in this world already. That's why I use the first formula. It's easy and it works. Sure, there are other variables I take into account. For example, with newer homes the percentage can be a bit lower because maintenance and repairs will be lower and, as a more desirable property, vacancy should also be less.

2 comments:

  1. Hi. It would be great to be able to charge 1% of my T2 flat´s value but, if I did, it would be empty all the time.
    My country´s reality is a bit different. With 1% of my flat´s value people can rent a brand new T3 so I have to rent my 23 years old T2 with furniture for less. The current market´s situation dictates the rent value I can charge...
    I do the same you do, I only charge one month rent to new tenants but I don´t make lease contracts. If I did, I had to pay 20%/month of the rent in taxes.
    I´m enjoying reading about your experiences very much. My dream car is also a BMW :)
    After reading your blog, I started thinking about buying another T2 flat, move there and rent my T3 where I currently live. It´s a big flat just for 2. To put this plan in practice, I need a fix job but now I only have a 3 year´s contract. After that, maybe I´ll become a permenent worker and put this plan in practice.
    I´ll be back often to read your updates.
    My PF blog is: http://www.mizej.com
    Regards, Mizé

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  2. Mizé, thanks for your comments. I would love to have an employment contract. Here in the States it is more common to have "at will" employment where the employee or the employer can terminate the employment at any time for any reason at all (or no reason at all!). Fortunately it looks like I may be offered a job shortly.

    Buying properties is a great investment, but be sure you buy at a great price and know the neighborhood. I encourage you to do your homework.

    Regarding the BMW, it's a thrill to drive. If only I didn't have the burden of paying for it!

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