When you have a second property that no one uses, you have two options: you either sell it or rent it out. Selling it might give you more money in one payment, but it also means losing all the house ownership. On the other hand, if you rent it, the house remains yours – yet you still profit from it.
The problem is that if you put the wrong renting price, you won’t have any potential tenants coming your way. The wrong price can also cause your listing to go viral. While that sounds like free publicity, this may prevent you from finding potential tenants even further.
So, how should you calculate a fair price for the home while making the most out of your investment? Well, here are a couple of ways for you to do that.
Use a Rent Estimator
Technology has proven to be a great asset for us nowadays, and we now have a tool for almost everything. This includes rent estimators. You can get a rent estimator by zip code, which will calculate the average price based on your home location.
Rent estimators have you inputting several other factors such as size, lease terms, median income, market trends, furniture, landscape, and more. The more you have to offer, the more you can charge for the rent. These calculators will show all the ups and downs so that you can get long-term tenants without accidentally setting the rent too high or too low.
The 1% Rule
The 1% rule is fairly common among people that rented homes before. That being said, if this is your first time renting a property, here is a quick explanation of the 1% rule. Simply put, it says you should set the price based on the home’s value on the market. The 1% rule states that your rent should be around 0.8%-1.1% of your home value. To set an example, if your home is currently around $350,000 on the market, then you may charge $2,800-$3,850.
To determine whether it should be 0.8% or 1.1%, you should consider your home’s amenities and total price. Cheaper homes (those that go at around $100,000) should be charged at the minimum range. On the other hand, if the property is more luxurious or expensive, you may go for the higher 1.1% range.
Comps, or “comparable sales,” will help you compare your home to other similar houses on the market. This is a technique often used to set the selling price of a home, but it can just as well be used to set the rent price.
The following comps are often used when setting the rent price of your home:
- Location: The more desirable your location, the more you can charge. Ultra-central homes in bigger cities can charge more rent than similarly-structured homes on the outskirts.
- Size: The bigger the homes, the more you can charge. Bear in mind that there is still a maximum amount you can charge based on the number of bathrooms and bedrooms you have.
- Amenities: The more amenities your property has, the more you may charge. For example, if your home has a great view, air conditioning, and a pool, or has been recently renovated, then you may charge more.
Look at similar properties and see how much they ask. Use the comps to set a fair price of your own.
Consider Your Financial Needs
Sometimes, you may need to consider your financial needs before you set up the rent price. For example, the house may not be entirely yours yet – you may still be paying a mortgage on it. If you want to move into another home and get another mortgage, the only way for you to cover your debt is to rent out your other property.
Think about how much you will need for your mortgage payments, insurance and taxes. Sometimes, you may have to go under your needed price if it is too high for the average housing market. That being said, for the most part, your rent price should help you at least cover the house expenses.
Bear in mind that if this happens, you may or may not get rental profit for it. Try to work the sum around and see if you can get it to a 5%-10% profit. Even if you don’t, you should remember that the received rent will pay off the house. By the time you finish making these payments, the value of your home will likely appreciate.
The Bottom Line
Calculating a fair rent price is not that difficult, provided you have the right tools and data. Look at similar homes sale in USA and see how much they are priced, compare them with your own home and set up the appropriate monthly payment.