14

This question already has an answer here:

I'm leaving the country for work for roughly a year, and would like to sublease my home to a friend of mine living in the area. I have no experience as a landlord, and I've had a tough time figuring out if an appropriate monthly rent can be estimated as some percentage of the monthly mortgage payment.

For ease of computation, let's say my mortgage is $1000/month on a 25 year mortgage. Are there any rules of thumb for what would be an appropriate estimate for monthly rent based on this information?

marked as duplicate by Philipp, Ganesh Sittampalam May 31 at 16:42

This question has been asked before and already has an answer. If those answers do not fully address your question, please ask a new question.

  • 6
    Would your friend take care of upkeep or will you have to hire that out? Which country are you in? – Hart CO May 30 at 5:09
  • Every answer says "go by comparable rents". All upvoted. The calculations you're talking about are fairly complex, highly individual to particular properties and the market you're in, and I wrote an Excel spreadsheet to do that, it has about 70 fields with all the intermediate figures etc. So no, no standard number. – Harper May 30 at 18:08
  • Can't you just look at it like an investment property? Imagine trying to get a loan from a bank to buy it from yourself. They won't give you a loan for $X if the building can't bring in $Y. That's the baseline to add every other consideration listed on this page. – Mazura May 31 at 1:03
  • @Harper - "comparable rents" may very well be an oversimplification. Especially if there are few similar rentals in the area. But 70 variables? To determine a fair rent? – JoeTaxpayer May 31 at 14:02
  • @JoeTaxpayer no no, fair rent is decided by Craigslist! There are about 10 inputs, fair rent is one, most of the 70 are intermediate values or answers. The question is "is it worth buying this house as a rental property?" The difference between "is it worth buying" and "is it worth keeping" is not that big. – Harper May 31 at 14:27
44

No.

The starting point is what other rentals are going for in the area. Supply and demand dictates a fair starting price. From there, you can adjust up/down for the fact that you know this person. (To be clear, this is the answer, i.e. the renter should neither know nor care what your costs are, only what similar properties rent for.)

(Note, there are other questions that discuss this idea) When one looks to buy a property to rent, they don't simply buy it, tally their annual expenses and divide it all by 12 to generate a proposed rent. In fact, that math is what tells the buyer whether or not the property will make a good investment. If the forecast income exceeds the expenses by enough, it may be a great deal. This briefly touches on the math of whether a potential new purchase would be profitable rental. It's not the same as your situation, market rent may make your rental profitable or a loss.

I'd ask these rhetorical questions -

In your case, if you owned the house outright, no mortgage, how much would you charge? If you bought it at the peak of the market and overpaid, with a high interest rate because you have bad credit, how much would you charge?

You can see, without actual numbers, these 2 results would be very different. And would lead to the possibility of (a) asking for a rent well below fair price, in effect gifting the friend the difference, or (b) asking for a rent that would be so high, the friend would ask why you were charging so much. I hope this is all clear.

Of course, you're not going to ignore your own numbers, you might pocket a few dollars or a few hundred a month, or have to pay that amount to have your house not go unoccupied.

  • 6
    The second sentence is the key here - renters don't care at all what you pay to own the property; they only care if they can live in a similar place for less money. Not clear what you're getting at with the rhetorical questions, the rent shouldn't really have much to do with how much is owed on the house. I suppose it could factor in since the potential tenant is a friend, so you might want a lower bound number below which you'd be losing money. – Nuclear Wang May 30 at 15:47
  • 14
    @NuclearWang that's the exact point of the rhetorical questions. If you could compute rent from the mortgage payment, then an owned-outright house should rent for nothing, and a house whose owner made a bad deal should bring in more rent, but the absurdity of those statements shows the flaw in the assumption that the question makes. – hobbs May 30 at 16:13
  • "When one looks to buy a property to rent, they don't simply buy it, tally their annual expenses and divide it all by 12 to generate a proposed rent. In fact, that math is what tells the buyer whether or not the property will make a good investment." No. They also need to look at capital growth, tax savings, leverage ratios, and portfolio diversification. – Sam May 30 at 16:50
  • @NuclearWang renters don't care at all what you pay to own the property;, that's not accurate... as a renter, I care whether the owner can afford to maintain the property to a good standard. Worst case landlord goes bankrupt, and what happens to the tenants then? – gerrit May 31 at 8:10
  • @hobbs For someone posting this question, the answer to those rhetorical questions might not be obvious. You're basically rephrasing the OP's question, which is "what's the relationship between my mortgage and rent?". You give two extremes of mortgage payments, and then leave it to the reader to deduce the right answer. If not for the second sentence, there wouldn't be much here to point someone to the right answer. The OP is clearly coming in with an expectation to base rent on the mortgage payment, so I'd expect them to want to charge differently in those two scenarios, which is wrong. – Nuclear Wang May 31 at 12:26
8

Not really. Imagine a house that was purchased 30 years ago or one that is paid off. The low/no mortgage has nothing to do with the rent.

Your rent should be more about "fair market value".

NOW, what you can coordinate is your rent vs how long your mortgage is.

When I'm paying off my own house, I usually go for 15 years.

For rental houses, I consider a "small business", and I also need to save some of the "profit" (profit = rent minus mortgage)....so I did a 30 year mortgage for my rental in that case. The profit, I sit aside some of it for repairs. And I use some of it for my living expenses of course. If I have an overage (rare), I can pay a little extra toward the rental mortgage. But that's a better plan for a small-timer-landlord (like me), then a MUST-PAY-EVERY-MONTH higher mortgage payment .. IMHO. (Again, its opinion stuff)

Check craigslist for comparable's.

Other "soft" considerations.

Longer leases. The less number of "flips" I have to do with renters, the easier my life is. I usually give small discount for a longer lease. But INCLUDING CLAUSES (in the lease) that rent can be reconsidered/changed after 3-4 years (<< you don't want to lock in a forever rate).

Again, that's my personal preference as a landlord. I would rather have a 3 year (good) tenant and lose $200-$300 / year vs lots of tenant flipping. Keep in mind, you're probably going to lose 2-4 weeks of rent during the flip process.

Good luck! Most times I'm glad I'm a landlord. A few times a year, it is a complete headache.

1

The only way that your annual cost of ownership is related to rent is if market conditions aren't good enough for you to retain the property as a landlord.

If your annual mortgage/taxes/utilities/upkeep minus the annual rent at a price point that will keep it occupied is too far negative then you are better off selling. If the property would cost you $100,000 this year in combined expenses but you'd only be able to rent it out for $60,000 you would need to decide if you are able to eat that $40k loss. The higher the price of the property the more aware of this you have to be as the market for rental shrinks the higher you go. Also it is difficult to completely guaranty 100% occupancy so you need to be able to ride out some months of no income depending on the market. Being house poor may make rental for a year completely impossible for some people.

0

EDIT

This rule may be US-specific, see comments.

The rule of thumb I've always heard and used during my time as a landlord is that a home rental should rent for approximately 1% of the value of the home per month. Example: a home that costs $200,000 USD should rent for about $2000 per month.

This rule of thumb is just that, so don't take it as a replacement for doing your homework on what similar properties rent for in your market. But it gives you a handy heuristic for deciding if it's feasible.

Note well that I made no mention of the mortgage. If your mortgage is such that 1% of the home's value per month doesn't give you plenty of wiggle room for upkeep (let alone profit) then renting this property is not for you. Remember, you're going to be out of the country which means you are going to have to hire a property manager (or give your friend discounted rent to act as such).

  • That rule-of-thumb most certainly doesn't apply in Europe. 2½% to 3% is more like the going rate in Cambridge (which is the market I know). And roughly ½% in Zürich. It wouldn't surprise me to discover that the rent-to-value ratio varied across the States too. – Martin Bonner May 31 at 12:30
  • @MartinBonner I've added an addendum about being US-specific, I have zero idea what the market is like in Europe. As for varying across the states, it's a rule of thumb, not a law of nature. It's reasonably consistent with the obvious exceptions of rent-controlled large cities. In markets where the rent is less than 1% you'll need a better debt-to-equity ratio to maintain profitability, in markets where it's greater you can skate by on a worse one, but OP asked for a heuristic and I gave one. – Jared Smith May 31 at 12:58
  • The origin of the rule of thumb is of course:(Simply put) If the interest on the value of the asset is larger than the rent for the same asset, then no-one would take a loan to by the asset instead of renting it. Similarly, if the interest is lower than the rent, everybody would buy (on loan) instead of renting. Therefore, give or take additional costs (insurance, repairs, taxes) and inertia cause by rentable assets being those bought some time ago, it is roughly the case that interst and rent are of about the same size. In principle, negative iterest rates could lead to negative rents ;) – Hagen von Eitzen May 31 at 13:41
0

tl;dr appropriate rent for me came down to the sum of the following:

  • Cost of the mortgage (which included escrow for property taxes and insurance);
  • Cost of repairs (educated guess, a property manager can help with this);
  • Acceptable amount of profit (you're taking a risk, you're entitled to some profit);
  • Cost of a property manager

I've been an unwilling landlord before and these are the biggest things I've found are important to consider when determining rent:

  1. A tenant that can reliably pay their rent timely (it's extremely annoying to have to chase down late payments, because whoever owns your mortgage note won't care that rent's late).

  2. A security deposit adequate to cover costs if there's a problem with item #1.

  3. Enough money in reserve to cover repair expenses (because you are liable for them).

  4. Somebody knowledgeable to facilitate repairs.

You mentioned that this is your friend and I could tell you to not do business with a friend, but I suspect you're unwilling to consider that.

All that said, you're going to be out of the country for a year. In other words, when something breaks, you can't practically enact repairs.

I strongly recommend you hire a property manager. They will be able to help you determine an appropriate rent for your property, act as an intermediary between you and your friend (which will make this more of a business relationship), and most importantly help make repairs to the property in your absence.

Hiring a property manager will usually cost you about 10% of the monthly rent's proceeds plus an upfront cost. You are responsible for the costs of repairs, but they handle all the coordination for you and they are usually able to get you discounts. If you get a good property manager, those costs are absolutely worth it. Do your appropriate due diligence on this.

Not the answer you're looking for? Browse other questions tagged or ask your own question.