I have created the Rental Property Conversion Series as a way to provide useful information to you about the process of converting a residential property into a rental property. This forum follows my own encounters as my husband and I convert our primary residence to a rental property.
In this post, I introduce some important factors to consider before establishing the rental amount for your property. This is the third topic covered in the Rental Property Conversion Series. Since this topic is a little lengthy, I will break it up into two parts. Stay tuned for part two in next week’s Make Money Monday post.
Previous posts in the Rental Property Conversion Series were:
Setting the Appropriate Rent, pt. 1
If you are preparing to convert a residential property to a rental, you will need to determine how much rent you would like to collect on the property. Chances are you are looking to net a profit from the rents you collect.
Before you can choose an appropriate rental rate, however, it is important to consider at least three things: your mortgage obligation on the property, the expenses you expect to incur in your roles as owner and landlord and the comparable rental rates in your area. In this post, part 1, I discuss the consideration of your mortgage obligation. In part 2 of this topic next week, I will discuss the considerations of your expected expenses and comparable rents in your area.
While there may be other factors for you to consider in your specific situation, these three considerations are among the most important.
What is your mortgage obligation?
Before establishing the appropriate rental amount for your property, take an account of your own mortgage obligation. What is the balance on your mortgage loan?
Julie at RevNYou, a website about real estate investment, has a 1% Rule that says your gross monthly income on a rental property should ideally be 1 % of the mortgage loan amount. While Julie discusses this rule in the context of quickly investigating rental properties you would like to purchase, I think it is also a good starting point when thinking about establishing the rent for a property that you already own.
According to Julie, although having a monthly rental income that is at least .08% of the mortgage loan amount is probably ok, after fees and other considerations, your cash flow may be a bit tight. To ensure a sufficient cash flow after the mortgage and fees are paid, therefore, the 1% rule is ideal. It is also a lot easier to calculate 1%.
Julie recommends setting aside 35% of your rental income for any fees, including management fees, taxes, insurance and maintenance. So, if you own a home and have a $300,000 balance on the mortgage loan, under Julie’s 1% rule, you should be making at least $3,000 in monthly rental income. After you set aside 35% for fees, or $1050.00, you should have enough left over to cover your mortgage.
But you must also take into account your specific circumstances. Thus, if you have liens or other outstanding debts on the property, or your mortgage interest rate is a higher rate such as 7% or 8%, you will have to account for this in your analysis. The bottom line is that you ensure all of your obligations can be paid.
Next week I will continue with part 2 of this discussion – considering your expected expenses and the comparable rents in your area when setting the appropriate rent for your property.
MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income. I try to focus on particular ideas and steps you can take to create alternative income and passive income sources. I have also begun a series of posts called “Rental Property Conversion.” This series follows my husband and I as we turn our property into a rental property. I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.