Home Rental Earnings Potential
Home Rental Earnings Potential
With interest rates continuing to rise, homeowners are considering whether it’s a good time to rent out their homes. And if they do decide to rent, they’re also wondering how much they can make from it.
For those who locked in a low-interest rate on their mortgages before the Federal Reserve began raising rates, selling their homes might not be as enticing now. The average interest rate on a 30-year fixed mortgage is currently at 6.81% as of July 27th, 2023. Instead of selling, homeowners are exploring the option of renting out their properties.
But is renting out your home even worth it? Let’s take a closer look at how much you could potentially earn.
Determining the rent you can charge for your property depends on several factors. Firstly, consider the income levels in your area. Cities with higher incomes can typically support higher rent prices. As a general rule, many people allocate a maximum of 30% of their monthly gross income to housing costs. For example, if the average monthly income in your area is $6,000, then 30% would be $1,800 per month. Realtor.com’s June 2023 rental report discovered that young families (ages 25 to 34) were dedicating 24.7% of their monthly income to rent.
Comparable rent prices in your area are also crucial to consider. Look at what other properties with similar conditions, square footage, amenities, and bedrooms are renting for. Location is another significant factor in pricing your rental. Properties in major metropolitan areas tend to charge higher rents due to higher demand. Additionally, the proximity of your property to job opportunities or places of interest can impact rental prices. Realtor.com’s study found that areas with significant growth in the technology sector saw higher median rent prices.
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While potential rental income can be enticing, it’s essential to consider the expenses associated with renting out your home. Even though you won’t be living there, you’ll still be responsible for property maintenance and repairs. Unexpected expenses resulting from a subpar tenant, such as major repairs, ongoing pest control, or legal fees, can also eat into your profit margins.
When setting rental prices, landlords often abide by the 1% rule. This rule-of-thumb estimates whether a rental property is a good investment and helps determine the monthly rent to charge. Simply multiply the home’s purchase price by 1% to find the minimum amount of rent you should collect. For example, if your rental property was purchased for $300,000, then your monthly rent should be $3,000. If median rents in your area are lower than that amount, you may need to reevaluate or make adjustments.
However, the 1% rule is not a hard and fast rule. You’ll need to consider other expenses such as repairs, insurance, taxes, HOA dues, and other variables to get a more accurate estimate of the rent you should charge.
Profit margins can vary, but even small net profits each month can add up over time, especially when considering rent increases (typically around 3% to 5%) from year to year.
It’s important to approach renting out your property with a thorough understanding of the market and the costs involved. By evaluating the factors that contribute to rental prices, comparing them to similar properties, and accounting for expenses, you can make an informed decision about whether renting out your home is worth it.
