The right decision of how much to charge for rent is crucial when it comes to the success of your rental properties. There is no single formula when it comes to the solution of this real estate question. In order to provide you with specific and useful information, we will review the case of single family homes. When is it a good idea to invest in single family homes for rent? How much to charge for rent? How to generate positive cash flow? Find the answers to these questions and more insightful information on this real estate topic in the section below.
Related: Why Is a Single Family House the Best Investment Property?
When Is It a Good Idea to Invest in Single Family Properties for Rent?
Single family homes have a couple of benefits when it comes to real estate investing. For example, they are cheaper in comparison to other investment properties such as multi family homes. Additionally, they are easier to maintain in terms of both time and money. Last but not least, this type of investment properties are, in general, more wanted by tenants, especially families. But when to invest in such a rental property?
Good Cash on Cash Return
Cash on cash return represents the net operating income (NOI) over the total cash investment. Cash on cash return is usually used as an indication whether or not it would be a good idea for a real estate investor to put money in a certain investment property. Experts in the field of real estate investing argue what a good cash on cash return is. Some consider that 8% to 12% is a sign of good cash on cash return. Other real estate investors, however, would not even consider investing in a property if the percentages are below 20%.
Good Cap Rate
Cap rate or capitalization rate calculates the return on an investment property based on the rental income that the investment property is expected to generate. Thus, cap rate equals the net operating income (NOI) over the current market value of the real estate property. Real estate investors usually use cap rate as an estimation of the potential return the real estate investor might have. This is an easy way to choose between various properties in the housing market. However, you should only compare the cap rate of, for instance, single family homes in the same area. A good cap rate is considered to be one a bit above the average for the area.
Nevertheless, if you are seriously considering becoming a landlord of single family homes, it is advisable to do more in-depth research before investing in any particular rental property.
Related: Cap Rate vs. Cash on Cash Return
How Much to Charge for Rent?
The main question any real estate investor of rental properties asks himself/herself is namely: “How much to charge for rent?” Yet again, there is no single answer to this real estate question. Not knowing how to properly price your rental property, however, hides the risk of having it vacant for long periods. Thus, you are risking your real estate investment business if your rent is not set up properly. How much to charge for rent highly depends on different factors:
#1 The Type of Rental Property
How much to charge for rent is not a constant but rather a variable. The rent varies in different countries, states, cities, and even neighborhoods. One of the most important factors is the type of the rental property: single family homes vs. multi family homes. The rent of single family homes is usually higher in comparison to multi family properties. The reason behind this is mainly the fact that single family homes are typically a representation of higher standard. Nevertheless, the landlord of single family properties is at higher risk. If one unit of a multi family property is vacant, it would not cause as much harm as a single family home being unoccupied. It is also required to do some research and find the supply of single family properties as well as the demand for such properties in the real estate market in the specific area if your choice.
#2 What are the Characteristics of Your Single Family Property?
Most tenants of single family properties look at them as their own homes. Therefore, they are more willing to keep the single family homes safe and clean. However, they are also more interested in the characteristics the investment property offers. This is another important factor in determining how much to charge for rent. Take into consideration the number of bedrooms, bathrooms, and living areas in your rental property. Also, what are the benefits your investment property has: a beautiful garden, garage, etc.? The more characteristics and pluses your single family home has, the higher you may charge for rent.
There are also some general rules in real estate investing when it comes to deciding how much to charge for rent:
#3 The Real Estate Market Value of Your Rental Property
Many real estate investors decide how much to charge for rent based on the real estate market value of their investment property. The rent usually varies between 0.8% and 1.1% of rental the property value. However, it is common that landlords charge around 1% if the market value of the rental property is around $100,000. If the real estate market value of your investment property is higher than $350,000, real estate investors usually charge a lower percentage for monthly rent.
#4 Take in Mind Possible Expenses
When considering how much to charge for rent, be sure to calculate any possible expenses. Such might be, for instance, the mortgage payments as well as any expenses on the rental property. Another thing to estimate is the taxes. As rental income is taxable, it is a good idea to see how much that would cost you as a real estate investor. The positive from this situation, though, is that you are able to deduct some expenses on the rental property. Such expenses are the repairs on the house, for example.
Related: Is Taking a Mortgage for Rental Property a Good Idea?
How to Generate Positive Cash Flow?
The main idea of every real estate investor is to generate positive cash flow and, thus, make money. Positive cash flow is when the money that inflow during a specific period of time are more than the money that outflow. Therefore, if a real estate investor has calculated all the possible expenses and has set up the correct rent charge for his/her single family home, there should not be an issue with generating positive cash flow.
For more materials and advice on the topics of rent, rental properties, and many more real estate issues, use Mashvisor’s accessible information!