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