Rental Property Investments: How Much Profit Should Be Expected Each Month?
If you have landed yourself the rental property of your dreams, it’s time to find the perfect tenants. Ideal tenants are within reach, but how much should you charge for your property to attract high-quality tenants and still gain on your investment?
What to Expect: Monthly Profits for a Rental Property
You will find a few ways to calculate your return on investment (ROI) for your rental property. Remember to include insurance, tax, HOA fees, and maintenance along with your monthly mortgage calculations to be sure you come out on top.
Here are a few ways to ensure you will make money on your investment property:
1% Rule: A quick rule of thumb is to calculate 1% of the amount you paid for the property and see if it is realistic to charge that much in rent. For example, if you purchase a home for $400,000, would you be able to find tenants if you charged $4,000 per month for the property? The number of bedrooms, location, nearby schools, and neighborhood will all go into calculating the going rate for rent.
Cap Rate: What is the capitalization rate? Going along with the aforementioned example, if you charge $4,000 per month for rent and make $48,000 per year, that is a 12% cap rate. That is a pretty good rate for a desirable neighborhood. You may settle on a lower rate for a rental property in a less ideal location.
Cash on Cash Return: If you purchased your property in cash or with a large down payment, then you will yield higher cash on cash return. You want to look for a CoC that is between 4% and 8% each year.
ROI: If you follow the 1% rule, you will be sure to gain a substantial return on investment. Remember that it is not always realistic to set your rent to 1% of your purchase price. If you need to attract tenants by lowering your rent, it is best to determine the lowest ROI acceptable for your investment. Then you will know the lowest you can go to make the investment worth it.
Keep all of these factors in mind when determining the monthly rental payments for your investment property. A paying tenant is better than no tenant at all, so always aim for a comparable rent to the surrounding rentals in the area.
How to Choose a Property that Will Attract Tenants
Of course, aside from choosing what to charge for rent, you want a property that is desirable to potential tenants.
Consider these aspects when looking for a rental property:
Great Location: Is the property close to parks, stores, and the community center? Are there walking paths that promote outside living and community involvement?
Established Schools: A property that feeds into strong public schools will always increase your return on investment.
Low Maintenance Home: Will the home require little maintenance to be on the market and in the business of turning a profit? If you have to put months of repairs and thousands of dollars into the home, you will need to calculate all that money into whether the investment is worth it.
Big Yard: Many people venture out to rent homes or condos because they want private outdoor space. Make it worth it for them by choosing a property with a good-sized yard.
Number of Bedrooms: To open up your potential renters to the largest group of tenants, look for a home with multiple bedrooms
Pet-Friendly: If your potential tenant is tired of getting kicked out of apartments for having a dog, welcome pets with open arms. You can set rules for the pets, but allowing them will only widen your circle of interested applicants.
Think outside the box about what would attract someone to venture outside of an apartment complex to rent an individually-owned unit. You can provide amenities that other rental properties may not offer.
At Blondin Real Estate we can help you find a property to turn into a great rental investment!
Contact us! We'd love to help you.
Want to read more? Check out:
How to Choose the Right Home Buying Budget