As you make your first investment in a rental property, you are probably considering making good profit yearly from that investment. After all, no one goes into business for sustaining loss! And, from what we all have seen happening in the market, it won’t be too difficult. After all, there are people in the renting business who are making such great profits from their investments!
Really sorry to burst that bubble of euphoria, but making that kind of profit comes with a lot of hard work and research. It is not as simple as getting a new property and renting it out. Today we will be taking a closer look at the factors that you will have to take into consideration while determining the perfect rent for your property and the profit margin that you can expect from it.
Factors to consider while calculating rent
So, now the big question is, what are the factors that you need to take into consideration to know how much you should be renting out your property for? Simply speaking, you will have to calculate the total expenses you will be bearing annually for the property and fixing the rent at a point beyond that. The expense heads will be as follows –
- Property tax
- Maintenance cost
- Advertising cost
- Brokerage charge
- Legal cost
- Lawsuit charges
- Eviction cost
- Entity structuring cost
- Insurance
- Cost of vacancy, or turnover cost
And such other costs.
These are the costs that you will need to get covered for if you are to remain profitable in the business.
How to fix the rent for your property?
Now that you know what are your cost heads, you will have to calculate the rent that will cover these expenses and will give you a profit above that on a monthly basis. Ideally, the simplest way to calculate the rent without having to go through such intense and extensive calculation will be to keep it at 2% of the value of acquiring the property. In case you took out time to calculate all your expenses and divide it into monthly average, it is advisable to keep the profit margin at around 30% to 40%. However, these calculations are based on assumptions that there is no further expenses being borne in between in relation to the property. Moreover, these rates are ideal condition and you might find that you are unable to charge this much in some areas. So, how should someone new to the property rental business proceed?
What you must keep in mind while fixing rent?
The most important thing to remember while making all these calculations is that the profit margin you are keeping above the cost is basically the extra buffer you are maintaining that will allow you to stretch your expenses if needed without actually paying for these expenses from your pocket. So, while calculating your expenses, always be liberal with the figures. If you are calculating it way too conservatively, you will end up having less buffer to sustain any sudden spike in expense. That is never a good idea, especially in this market.
The next thing to consider is the yearly increment of the rent. This needs to be calculated based on the probable increment in the cost you will be bearing in order to maintain the property. The taxes generally don’t go up all of a sudden. However, the cost of maintenance will keep increasing with each passing year and you will need to take this into consideration. The same goes for legal charges. If you are lucky enough not to experience much eviction or period through which the property remains unoccupied, that will add to your profit. However, never presume this to be the case and always account for the added cost under such scenario to keep your investment protected.
The location and market will be final deciding factor
Having said all these, fact remains that you simply cannot ask for a higher than market rent, or your property will remain extended periods of non-accommodation. So, always find out the market rate and calculate backwards to decide what the property should cost you. If the cost is beyond the calculated value, never invest. In the end, if is your investment and you will always want to keep the cash flowing with positive and high ROI.
Checkout here – Rental property calculator
