A lot of people invest in rentals not quite knowing how to figure their actual return on investment (ROI). Buy a property and rent it for more than the mortgage, right? Well, that’s part of the equation but there are a few other factors as well.
First, how do you figure how much rent your property will bring? Always keep in mind that the rental rate is set by current market conditions and not by how much your mortgage payment is. A quick look at Craigslist can tell you the current market rate of comparable properties but it’s only a snapshot of what’s going on today. A good rule of thumb is to check quarterly so you can keep in touch with the ups and downs of rentals in the neighborhood. You can usually get a better rate if you turn over tenants in the summer but that’s not always the case. Sometimes spring or fall can actually bring a higher rent.
A periodic check of comparable rental rates in your area can also help you determine if and how much you may be able to raise rents each year. Being able to raise the rent every year is wonderful but if the property sits empty for even a month, it can take months to recoup the lost income.
For example, if you are advertising your rental at $1800/month, that will bring you $21,600 for the 12 month period typical of a lease. However, if the property is overpriced and sits empty for a month, your gain for the same 12 month period is $19,800. If you had dropped the price to $1700/month you would be at $20,400 for the year, or $800 ahead. That would pay for a really nice weekend getaway!
Second, don’t forget to factor in those hidden costs of running a rental, like the cost of your time. Communicating with tenants, depositing rent checks, contracting for repairs and seasonal maintenance. It adds up to quite a bit of time! A good property manager more than makes up for their fees by fielding all of the questions and scheduling associated with your rental.
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