The decision to sell your house can be a big decision, especially during a seller’s market. Before committing to sell, for some property owners, it makes sense to rent out the house for a few years to see how market conditions evolve.
If that’s the route you choose, you have automatically become a landlord and property manager. You’ve dodged some of the hassles of selling, but now you have other questions to answer, such as “how much rent can I charge for my house?” And “do I have the mindset to succeed as a landlord?” Or “how do I find a good tenant?” Becoming a landlord involves more and different responsibilities than what you deal with as a homeowner.
Consider these three critical questions before renting your house.
1) Are you ready for the responsibilities of managing tenants? As a landlord, you take on a list of tasks that include understanding your local landlord/tenant laws, showing the property, managing the leasing and move-in process, tenant communication, collecting rents, navigating possible eviction, and fixing the house if there are damages.
2) Can you handle maintaining the property while it is occupied? Even if you’ve stayed on top of maintaining the house, you’ll likely need to complete a few repairs – and possibly paint – before you welcome your first tenants. All of the home’s systems, such as the plumbing, electrical, heating and cooling, and sewer, should be in safe, good working order. Plus, you’ll need to address any leaks in the roof or foundation.
With your tenants in place, it is your responsibility as the landlord to complete any home repairs in a timely manner. This typically means within 24 to 48 hours if it is an emergency repair or within a week for non-emergencies. Can your schedule accommodate unexpected demands? Can you manage contractors to do the work for you if your schedule does not allow it?
3) Is the timing right to put your house on the rental market? Consider the season when your house will become available. Summer is typically the peak rental season. People are moving and intend to settle into their new homes before fall, especially if they have families with school-age children or college students who need to be settled before school starts in the fall. Winter is usually the slow season for rentals; in a northern area where it snows for a solid 4-5 months, and it is colder in most locations people are less likely to move during that period.
Once you have determined that you can take on the responsibilities of renting out your house, the next consideration is rental pricing. How much can you charge for rent?
Here are three approaches to determine the rental rates for the house.
1) Estimate your rent based on 1% of the home’s value
Many landlords use this rule of thumb to estimate rent for their properties, particularly those in the $100,000 - $200,000 range. If you use this estimate on a higher-value home, you can easily price your property out of the market.
Here is an example of the 1% estimate at work for a property valued at $200,000:
$200,000 x .01 = $2,000 If your property is in good condition and in a desirable location, pricing your rental at $2,000 a month makes sense. If you have special features like an updated kitchen and bathroom, you could ask for more.
2) Price your rental to cover expenses
When you’re a new landlord, consider pricing your rental to cover the mortgage, taxes, insurance, vacancies, and maintenance. This calculation can provide a reasonable estimate, depending on your goals.
- If your goal is to hold the property for the short term and sell it after 5-10 years, conservatively covering your costs may be enough.
- If your goal is to hold on to the property for a longer-term,10-20 years, be sure to add in an amount for profit, 5-10% each month.
Here’s how the expense coverage pricing model works for a $200,000 property. For this example, we’ve assumed a mortgage is based on a typical investor loan with an interest rate of 5.5% amortized over 20 years.
If you have additional costs for the property, such as separate sewer or utilities, include them in the calculation unless your lease specifies that these are the tenant’s expenses.
3) Research the rental rates of homes in the area using a rent estimate report
A Rent Estimate Report from RentSpree pulls together all of the information you need for rental pricing, whether you are a new or seasoned landlord. The report assembles comparable properties, local vacancy rates, and key market trends to help you set rental rates.
- Information on comparable properties will help you determine if your property is at the high end or the low end of the spectrum compared to other similar properties in your area. When comparing properties, look for other rental houses with similar rooms, bedrooms, bathrooms, overall square footage, plus amenities such as a garage, backyard, transit proximity, and any other special features such as a pool, hot tub granite countertops, new appliances.
- Local vacancy rates will tell you how competitive the rental market is at any given time. A low vacancy rate signals potentially high demand for your property, which means you may be able to price your rental more aggressively. Conversely, a high vacancy rate means fewer tenants will choose from more available properties so an attractive rental rate will be important.
- The key market trends will show you movement in rental rate increases or decreases over time. This data is broken out by the number of bedrooms for easier comparison. These trends also show rent increases or decreases by zip code, county, or state over the past month, three months, and 12 months.
This report can give you a good idea of how your property fits into the market and help you determine your best range for rent to attract the best tenants and keep your property occupied.
Marketing your property
Writing up a rental listing can be art all unto itself. You want to highlight all of the property’s great features to justify the rent amount you’re charging. Include mentions about any upgrades or renovations and any amenities as part of the property, such as a garage, pool, large backyard, hot tub, or off-street parking.
The real estate market fluctuates, so it’s essential to keep up with the rise and fall of rental rates and property prices in your neighborhood. Evaluate your rental rate each time you have a tenant move out of your property. This will help you stay in line with market rents.