Is Your Rent Too Low? Too High?

How much rent can I charge?  How much is too much?  Too little?  This is a time-worn question for every property owner.  First and foremost, this business is about producing income, but if you ask for too much in rent you won’t get any applicants.  The good news is that nationwide, rents are up almost 7% over last year at this time.  And even better news . . . this trend is likely to continue on through 2012.

According to an article that appeared in the Smart Money section of WSJ, vacancy rates are down.  Property managers are seeing an increase in applicants; people are moving from foreclosed properties, and people who had previously moved in with friends or relatives are now moving back out on their own.  Here’s the full article:

So this is all good news.  The rental market is strong, rents are skyrocketing.  But the question remains . . . how much is too much?  You can look for other “For Rent” signs in your area and find out what others are charging, and also check on Craig’s List for comps.

But here’s another tool to add to your list:  It’s a nifty little site.  You can type in the address/rent you’re planning to charge on the property in question and a map pops up, showing other rentals in the area and what the rents are on those properties.  Very cool.  And there’s a little meter off to the side that advises you on whether you may be charging too much or not enough.  (Although, you can certainly figure that out on your own from looking at the numbers shown.)

Hey, every little bit helps . . . use all of the tools available to you, do your research before assigning a rental amount to your property, and you’ll feel confident as you move forward.  Rents are rising . . . it’s time to take advantage of this market . . . woohoo!

Rent, or Buy?

The early 2000s . . . ah yes, the good old days, when home prices were soaring and investors were flipping houses and making money hand over fist. And then, the total collapse . . .

With today’s economy in a state of flux and the real estate market still flat-lining, thousands of wonderful homes are sitting on the market. Homeowners are under water on their mortgages and can’t sell, and are becoming landlords by default.

People are nervous. The banks, who were so crazily free-wheeling a few years back, have tightened the purse strings to the point where applicants who deserve loans are being denied. Even those who are capable of purchasing homes are hesitant:

  • They’re unsure of the direction of the economy
  • They fear being laid off.
  • With the rising cost of education, they’re choosing to put money in their children’s college funds rather than invest in “The American Dream.”

But for those who still lust after that traditional dream, there’s a formula — although a loose one at that — that might help determine if your city is one in which it’s better to rent or buy. It’s called the rental ratio formula and here’s how it works.

You take the cost of the house you’re looking to buy, and find out what the comparable place would cost to rent, for one year. Divide the total yearly rent by the sale price of the home. If the asnwer is less than 15, it makes sense to buy rather than rent.

For example, on the three-bedroom foreclosure I purchased last fall (See “And Speaking of Fortunes Being Made . . .”, October 2010) the rent I receive is $825/month x 12 = 9900. In this Indianapolis market, I bought that home for 35K and with repairs, have a total of 40K in it. But, the surrounding homes are worth (in a normal market) 80K. Either way, when I do the equation, the results are 4 and 8.5, meaning Indy is definitely a city where it’s better to buy.

But don’t be fooled by the numbers or the gurus. Even though this formula says it’s more costly to rent than buy, our Indy rental market is very strong and I don’t see the end in sight. My 27 rental units never stand empty, which tells me there’s opportunity on both ends — both as a buyer, if you can qualify, pay cash or use private money — and as a landlord who rents out your properties.

So don’t be shy . . . now’s the time to buy!