Use the 1% Rule to Determine How Much You Will Be Charged When Renting Your Property
Owning a rental property is a great way to generate passive income . If you are unsure how to choose a property or determine the rent, use the 1% rule as a guide.
As personal finance site Afford Anything points out, if the rent you charge is less than 1% of the total rental value of the property, it will take too long for the property to pay off. Additional costs accumulate over the years and you still have to recoup the initial cost. If you charge anything less than 1% of the home value, it can pay off in decades:
If the property is worth $ 205,000 and the rent is $ 2,000, this is a rounding error. This is ok as the rental prices are approximate. Properties that are “rented” for $ 2,000 can cost anywhere from $ 1,900 to $ 2,100, depending on the season, lease term and other variables.
Rent is a range. There is no such thing as a property that can only be rented for $ 2,000 without any modification. Even at this price, GRM 102.5 instead of 100 will not kill your profit. But if the property is $ 205,000 and the rent is $ 1,400, skip this. You deserve the best.
For tenants, the other side of the coin is also useful information. If you are browsing properties for rent, you can also find out how much it is worth in the market on sites like Zillow. If the price / rent ratio is unfavorable for the landlord, it may be favorable for you, allowing you to get more home in a better area than what you pay for it.
Why the one percent rule matters (when renting …) | Allow yourself everything