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Landlords: determining your rent
By Justin Hunter
Becoming a landlord is a wise investment, but it also takes dedication and hard work.
Staying up on maintenance and codes can be tiring but it is all worth it when you are making more than you spend and eventually sell the property for much more than you originally paid.
The most important thing you must determine in order to become a successful landlord with lucrative returns is how much to charge for rent.
M. Anthony Carr’s article, “Determining Rent Determines Your Wealth” in the September 8, 2006 edition of Realty Times, provides some helpful suggestions to determine a profitable rental price.
Creating a healthy positive cash flow from your rental properties is one of the signatures of the real estate investment game.
“Setting up just how much you want to walk away with each month, however, isn't as simple as adding up all your expenses, tacking on an additional 25 percent and sitting back waiting for the tenants to move in.”
There are two systems you can implement to arrive at a successful, lucrative rental price.
The first possible system is the "return on investment," which is how much money you want to make on your investment including the amount of annual expenses for the investment.
“For example: if you put $20,000 down on a property and you want to receive a 10 percent return on that down payment (total of $2,000 per year); First add up all your expenses (say, $12,000 per year for mortgage and $2,000 for maintenance and upkeep). Then add in the desired annual return, thus you would need to bring in $14,000 per year in rental income to meet your goal -- ergo, the rent charged would be $1,200 per month.”
The other rental determining method is similar to conducting a comparative analysis (CMA) for a property for sale.
“In rentals, you do the same. What are the rentals going for in your area for your type of property? What's the condition of your investment property compared to those that just rented? Make an adjustment for condition and location, set the rent level and get the house listed.”
The great thing about this method is that the current status of the market favors it. More and more people are unable to afford the rising home prices, so they are paying large sums of money for apartment rentals, just to save some extra money each month to eventually put down on a house.
“In Montgomery County, Maryland, a suburb of Washington, D.C., that type scenario exists currently. According to the local MLS, last year at this time the average single-family home rented for about $2,500 per month. This year, the rent average has shot up to more than $2,800 per month -- that's $3,600 more per year. That type of cash flow growth makes any investor very happy.”
Renting out properties can be a stressful process. There are a number of factors to consider before embarking on the venture. Just make sure your monthly rents allow for some liquid cash flow.