Welcome to our first Blog of 2020!
One of our most frequently asked questions is: We want to move at some point in the future, and right now we have a mortgage on our home. We are considering renting it out. How much over our mortgage payment can we ask for rent? Obviously, there are costs associated with renting the home out, taxable income, maintenance on the property, etc., so if we rent it out, we don't want to just charge what we're paying on our mortgage - we'd be losing money if we did that.
Given the assorted costs associated with maintaining a home/rental property, what is the minimum amount of rent that would be reasonable to charge above the cost of the mortgage? Is there some rule of thumb to use? For example, say your mortgage/tax/insurance payment is $1,000 so add 50% and you'll need $1,500 in rent to pay taxes on your rental income, put money away for eventual repairs, etc.?
If you are looking to decide on a rent based on your costs, it doesn’t work that way. You need to look in the area and find out what your property will rent for. That number will tell you whether you can afford to treat it as a rental or would be better off selling. You can't just pick a number and rent for that amount. If you want to rent out your property you must rent it for a value that a renter will pay. Market value. You must take your personal feeling about the property out of it as well.
For example: An owner is looking to rent their property 2,500 a month. This amount covers the owner’s mortgage, and a little bit more for taxes and repairs. Every other comparable property in the area is renting for $1,500 a month. There is no value to a renter in renting a property for $1000 more.
The rent is determined by the rent being charged on similar properties in the area. Your mortgage costs/expenses(unfortunately) have no bearing at all on the price you will get.
What you can look at is cost mitigation. Say your property is worth $400,000. The power and gas and water should be left on. This can be $100 or more. The insurance and taxes must be paid, again another $100 or more. There is the speculation tax .05% and empty homes tax 1%. approximately $50 per month for both. Property taxes $150. Let's say your mortgage is around $1,000 a month. That means to sitting empty your property would cost a minimum of $1,400.
Now if you were to rent the property, a lot of those costs could "go away" by collecting rent. Empty home costs $1400, let's pad that with 10% for repairs and go with $1,540.
Now let's assume you can rent for $1,300 a month. Your choices are let the house sit empty for $1,540 a month or rent it and only "lose" $240 a month. Keep in mind that in most cases you will most likely, be gaining equity.
It makes sense to rent out the property and pay the $240 as an investment. For every $240 you pay, and the $1300 your tenant gives you, your equity increases as you pay down the mortgage (interest and fees aside, but you get the point). You own a property increasing in value, AND have the majority of your costs paid.
It's not a money maker right now, but the longer you own the property two things happen. That $240 investment a month helps pays off the mortgage, and eventually you own a property that has increased in value.
Tammy de Diego Mott
VP - Operations