Renting out your house might be worth considering, especially if you’re ready to relocate and you’re opposed to selling. Picking up a tenant could help you pay off your mortgage more quickly.Then, you could put the money you’ve earned toward a financial goal, like perhaps into a retirement account. If you’renot sure what to charge for rent, we’ve got somefactors you’ll need to take into account.
Do you have questions about how your rental income could affect your long-term financial plan? Consider speaking with a financial advisor.
What to Consider Before Renting Out Your Home
Deciding to rent out your house rather than sell it might make sense for various reasons. Homes can be tough to get rid of, particularly if your asking price is too high or your home listing isn’t visible enough. And selling might not be a viable option if you haven’t built up enough equity in your home. If you’re looking to purchase a different home, you could take your equity and use it to make a down payment.
But allowing someone to rentyour home, even temporarily, is a big deal. For one, are you ready to become a landlord? Regardless of how responsible your tenants might initially seem, they could end up destroying your home or bringing down its overall property value. And you’ll need to be prepared to have a flexible schedule so your tenants can reach you if a toilet clogs or a pipe bursts.
Turning your home into an investment property could be a financially risky move as well. You might have to spend money to fix up the property before you can rent it out. While there are many tax breaks available to landlords, it’s best to plan on paying for expenses such as property taxes, maintenance costs and homeowners insurance. Plus, you’ll be on the hook for paying the mortgage as well if your tenant suddenly moves out and it takes time to find a replacement.
On the other hand, renting out your home could provide you with enough money to pay off your mortgage. That could be a great way to rake in extra cash if you’re waiting for your home’s value to go up. You could then use the remainder of your earnings as profit or savings.
How Much Should I Charge for Rent?
When you’re trying to determine how much rent to charge, there are a number of things you should think about. A good first step is figuring out what your home’s currently worth in the market. That amount could be different from the original price of your home.You could use a website like Zillow to estimate your home’s value. But it might be best to find a home appraiser who can give you a more accurate assessment of what it’s worth, based on the condition of the home, local home sale prices and where the home is located.
The amount of rent you charge your tenants should be a percentage of your home’s market value. Typically, the rents that landlords charge fall between 0.8% and 1.1% of the home’s value. For example, for a home valued at $250,000, a landlord could charge between $2,000 and $2,750 each month.
If your home is worth $100,000 or less, it’s best to charge rent that’s close to 1% of its value. If your house is more expensive, you may want to charge less rent so that you can attract more tenants. Charging rent that’s too high will make living in your house unaffordable for many people.
Other than your home’s worth, you’ll also need to consider what landlords are charging for similar rentals in your area. If the rent you want to charge is unreasonable in comparison to other rentals in your area, you might struggle to find a tenant who’s willing to commit to your terms. A website like Trulia or Craigslist can show you how the rental rate in your head stacks up against the rates your competitors are offering.
If you’re renting out your house so you don’t have to pay for your home loan, the rent you charge has to be at least equal to the cost of your monthly mortgage bill. Don’t forget to factor in an estimate of repair costs, taxes, homeowners association fees and insurance when you’re deciding what to charge.
One other thing to keep in mind: You can’t necessarily choose whatever rental rate you want. Some states limit what landlords can charge for rent, security deposits and late fees. Rent control laws exist, for example, in places like New York, Maryland, California and Washington D.C.
How Do I Put My House Up for Rent?
When you’re ready to find tenants to rent your home, you can ask a real estate agent to list it. But that comes with a cost. You’ll owe your agent commission, whether that’s equal to one month’s rent, or another percentage.
If you want to publish your real estate listing, you can upload it onto a site like Zillow. You can make flyers to hand out or use your social media accounts to get your rental out there. Before you hand over the keys to your house, be sure that your prospective tenants have solid financials. Doing this will ensure you know they can afford to keep up with their rent.
Bottom Line
If you’ve chosen to rent out your house, you can’t charge rent solely based on your mortgage payments. Picking a rental rate based on the total cost of turning your home into an investment property and on other rent prices in your area can ensure you simultaneously make a good return and find tenants promptly. This part of becoming a landlord is perhaps the most important. It could determine the success your property has for the foreseeable future.
Tips for Using Rental Income to Maximize Your Financial Plan
- Owning and renting out an apartment or home can have a profound effect on your income picture. A financial advisor can help you use this income to better your long-term financial plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re unsure about investing in homes, apartments or land, check out SmartAsset’s comprehensive guide to real estate investing.
Photo credit:©iStock.com/kosmos111, ©iStock.com/Gawrav Sinha, ©iStock.com/DanielMirer
FAQs
The 1% Rule
How do I figure out how much to charge for a rental? ›
To determine how much rent to charge a tenant, many landlords use the 1% rule — which suggests charging 1% of the home's value for rent. For example, a home valued at $220,000 would rent for $2,200 per month.
How to determine how much to rent? ›
In order to calculate the right rental rate, you need to determine the value of your property first. As a rule of thumb, the rental rate should be between 8%–1.1% of your property's total value.
How do you calculate how much you should pay for rent? ›
30% Income Rule
According to the rule, you can multiply your gross monthly income by 0.30 to determine the maximum rent you can afford. For example, if your gross income is $5,000 a month, your rent should be a maximum of $1,500 (5,000 x 0.30 = 1,500).
What rent should I charge? ›
To gain a baseline of how much you should charge for rent, start by calculating 1 percent of your property value. The rent you charge should be around this amount. In fact, it's unlikely that you'll want to charge less than 0.8 percent of your property value or more than 1.1 percent.
What is a reasonable percentage of income to spend on rent? ›
A popular standard for budgeting rent is to follow the 30% rule, where you spend a maximum of 30% of your monthly income before taxes (your gross income) on your rent. This has been a rule of thumb since 1981, when the government found that people who spent over 30% of their income on housing were "cost-burdened."
How to calculate monthly rent? ›
The weekly rental amount is divided by 7 to determine the daily rental rate, then multiplied by 365 (days per year) to determine the yearly rate and finally divided by 12 to determine the monthly rental amount.
What is the formula for rental property? ›
To calculate the property's ROI: Divide the annual return by your original out-of-pocket expenses (the downpayment of $20,000, closing costs of $2,500, and remodeling for $9,000) to determine ROI. ROI = $5,016.84 ÷ $31,500 = 0.159. Your ROI is 15.9%.
How do you calculate rental expenses? ›
The 50% Rule states that normal operating expenses – excluding the mortgage payment – for a rental property can be estimated to be about one-half of the gross rental income. If the gross rental income is $1,000 per month then the estimated operating expenses could be $500 per month.
How do you calculate what you can rent? ›
How is rental affordability calculated? The general rule of thumb is your annual income should be 30 times the monthly rent. Or, you can multiply the yearly rent by 2.5 times.
To find out the rent per square foot, take the yearly rent and divide by the square footage of the space. For example: annual rent is $50,000 to rent a 2,000 SF space. To find the rent PSF divide $50,000 by 2,000 = $25/SF.
How do you calculate rent percentage? ›
To calculate it, divide the base rent by the percentage. In this case: $5,000 ÷ 7% = $71,428. When Moonbucks' sales exceed $71,428, it must pay the landlord 7% of every dollar it brings in as sales.
What percent of your budget of $2500 would your rent be if you pay $650 in rent? ›
Final answer:
To find the percentage of your budget that your rent would be, divide the amount of rent you pay by your total budget and multiply by 100. In this case, the rent would be 26% of the total budget.
How much house can I afford if I make $90000 a year? ›
So someone earning $90,000 per year, can reasonably afford to spend between $22,500 and $29,700 on housing each year — which translates to between $1,875 and $2,475 per month. That's a substantial enough chunk of change to cover many mortgage payments.
How to budget for an apartment? ›
Follow the 50/30/20 Rule. This means putting aside half their income for hard needs, such as rent and utilities, 30% for wants, such as social activities, and 20% towards savings.
How should you calculate rent? ›
The simplest way to determine how much rent to charge for a house is the 1% Rule. This general guideline suggests that you charge around 1% (or within 0.8-1.1%) of your home's total market value as monthly rent payments.
How to calculate fair rental value? ›
Find three to five comparable occupied properties with the same square footage and number of bedrooms and bathrooms. Calculate the average rent for all these properties. This will give you a good idea of fair market rent. Adjust rent up or down based on the factors affecting your property.
What is the price to rent ratio? ›
The price-to-rent ratio is the ratio of home prices to annualized rent in a given location. This ratio is used as a benchmark for estimating whether it's cheaper to rent or own property. The price-to-rent ratio is used as an indicator for whether housing markets are fairly valued, or in a bubble.
What is the 50 20 30 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What is the 20 percent rule rent? ›
You can also use the 50/30/20 budget as a guide to figure out how much you can afford to spend on rent. This method allocates your take-home pay (after taxes) to 50% for needs, 30% for wants and 20% for savings and additional debt payments.
You should spend no more than 25% of your monthly take-home pay on rent. Spending 30% or more will mean not having enough room left over in your budget to put toward other important financial goals like saving for a down payment on a home.
How do you calculate monthly rent expense? ›
To find out your monthly rent, you'll take your gross rent (or your net rent plus taxes and CAM) and multiply that by the number of square feet you rent. This is your yearly rent expense, which divided by 12 will allot you your monthly rent.
What is the formula for daily rent? ›
To calculate the daily rental amount, start by multiplying the monthly rent by 12 months ($1500*12=$18,000). Then divide the sum by 365 days ($18,000/365=$49.3150684932 rounded up to $49.32) to find the daily rental amount.
How to calculate rental income? ›
Gross yield on a rental property is the percentage of profit before expenses have been deducted. To calculate, first multiply the monthly rent amount by the number of months in the year to determine the income from rent; then, divide the income from rent by the appreciated home value.
How to calculate rent per day? ›
It works like this: take the monthly rent and multiple it by 12 to find the total yearly rent. Then divide the sum by 365 to determine the daily rent. Once you find the daily rent, you multiply it by the number of days the tenant will occupy the unit.
How do you calculate the price per square foot? ›
Price per square foot is typically calculated by dividing the purchase or list price of a home by the overall total square footage of the home. For example, if a 1,000 square feet home is priced at $200,000, the price per square foot is $200.
