Determining How Much You Should Charge for Rent

Renting out your home can be a smart move, especially if you’re relocating and not ready to sell. A tenant can help you pay off your mortgage faster, allowing you to channel those funds towards other financial goals, such as retirement savings. However, determining the right rent amount requires careful consideration of various factors.

If you have questions about how your rental income could impact your long-term financial plan, consider consulting with a financial advisor.

What to Consider Before Renting Out Your Home

Deciding to rent your home instead of selling it might be beneficial for several reasons. Selling a home can be challenging, particularly if the market is slow or if you haven’t built up significant equity. If you’re planning to buy another home, renting can provide a steady income stream while you wait for your home’s value to appreciate.

However, becoming a landlord comes with responsibilities and potential risks. You’ll need to be prepared for the possibility of dealing with problematic tenants, maintaining the property, and handling unexpected repairs. Additionally, renting out your home can be financially risky. You might need to invest in repairs or upgrades before renting, and you’ll still be responsible for property taxes, maintenance costs, and homeowners insurance, even if the property is vacant.

On the other hand, renting out your home can help you pay off your mortgage, allowing you to save or invest the remaining earnings.

How Much Should I Charge for Rent?

When determining how much rent to charge, consider the following steps:

Assess Your Home’s Market Value: Start by determining the current market value of your home. This amount could differ from the original purchase price. Use online tools like Zillow or hire a professional appraiser for a more accurate assessment.
Calculate Rent as a Percentage of Home Value: The rent you charge should typically be between 0.8% and 1.1% of your home’s market value. For instance, if your home is valued at $250,000, you could charge between $2,000 and $2,750 per month. For homes worth $100,000 or less, aim to charge closer to 1% of the home’s value to attract tenants.
Compare Local Rental Rates: Research what other landlords in your area are charging for similar properties. Use websites like Trulia or Craigslist to compare rates and ensure your rent is competitive. Charging too high could make it difficult to find tenants.
Cover Your Costs: At a minimum, your rent should cover your monthly mortgage payments. Additionally, factor in potential repair costs, property taxes, homeowners association fees, and insurance premiums.
Consider Legal Limits: Be aware that some states have regulations on rent, security deposits, and late fees. Rent control laws exist in places like New York, Maryland, California, and Washington D.C., which may limit the amount you can charge.

How to Put Your House Up for Rent

When you’re ready to rent out your home, you have several options:

Hire a Real Estate Agent: A real estate agent can list your property and find tenants, but you’ll owe a commission, often equal to one month’s rent or a percentage of the rental income.
List Your Property Online: Use platforms like Zillow to publish your rental listing. You can also create flyers or use social media to market your property.
Screen Potential Tenants: Ensure that your prospective tenants have solid financials and a reliable income to cover the rent. This step helps avoid issues with non-payment or eviction.

Bottom Line

When renting out your home, don’t base the rent solely on your mortgage payments. Consider the total cost of maintaining the property and local rental rates to set a competitive and profitable rent. This careful approach can help ensure the success of your rental property.

Tips for Using Rental Income to Maximize Your Financial Plan

Owning and renting out property can significantly impact your financial picture. A financial advisor can help you integrate this income into your long-term financial plan. Finding a financial advisor is straightforward with Square One Planning’s free tool, which matches you with up to three vetted advisors in your area. You can have an introductory call with your matches to choose the best fit for your needs. If you’re ready to find an advisor to help achieve your financial goals, get started now. If you’re unsure about investing in real estate, explore Square One Planning’s comprehensive guide to real estate investing.