A rental property can be a savvy investment that pays for itself, but it can also be a massive financial burden that requires constant upkeep. If your tenants don't cover your mortgage, you could be stuck waiting decades before you begin seeing a profit from your rental house. If you want to immediately begin making money off of your investment property, you'll need to charge at least enough to cover your mortgage payments. If you can't find a tenant willing to pay this amount, you might have to lower your asking rate to get tenants in your house and begin paying off your mortgage.
To cover your mortgage, you'll need to charge at least as much as your monthly mortgage payment. If you're contemplating buying a rental property, try plugging the home cost into a mortgage calculator to determine the monthly cost. You can then choose a repayment schedule that allows you to charge enough rent to cover your mortgage without overcharging your tenants.
Fair Market Value
The going rate for rental homes in your area should be key in helping you decide how much rent to charge. Look at real estate listings or ask potential tenants what kinds of rates they're seeing. If your monthly mortgage is much more than this, you might have trouble getting a tenant. You might need to refinance to get lower mortgage payments or simply cut your losses and begin paying part of the mortgage yourself.
The mortgage isn't your only cost with a rental unit. Pipes break and heating units blow cold air, and landlords have to fix these problems. You can expect to spend anywhere from a few hundred to a few thousand dollars a year to keep the house in good working order. If you can, consider adding a few hundred dollars to rent payments each month to cover these unexpected expenses. It's more likely you'll be able to do this if you have low mortgage payments.
Taxes and Insurance
Depending upon where you live, property taxes and homeowners insurance can add a hefty burden to your costs. Even if your mortgage is covered, you might pay a few hundred to several thousand extra dollars each year, and rolling these costs into your monthly rental fee can reduce your costs of home ownership.
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.