figuiring out rent percentage.

[Julia Geiger]

Hello everyone, 

I have recently moved out of Ohio and made my way to Florida.However, I am still trying to sell my home in Ohio. So without any luck and the holidays around the corner we are considering renting out our current home so we can buy a home here in Florida. Also so we don't lose our behinds on the house in Ohio. I was trying to use the rental calculator here on BiggerPockets. I here Josh and Brandon always talking about oh your rental rate or whatever they call it is 1 or 2 %. I am having a hard time understanding how they come to that number. I know this may sound dumb but any tips or tricks on how to figure that out would be great! It seems like the rental calculator is more on a current purchase where we have had our home for 2 years. That could be what's throwing me off. Just some basic numbers. Our mortgage is $1300 and I would like to atleast break even or try and make a couple hundred bucks a month on it. But really just trying to get by until maybe summer or something when the sales market might be better. Thanks so much guys! 

[Brian Pleshek]

HI @Julia Geiger. The 1% or 2% rule applies to when you're doing a quick evaluation to see if BUYING a property for an investment makes it worthwhile. It's just a heuristic. That doesn't really work for you when you already own the house. Your house will rent for whatever the market rate is in your area. You can look at many places online to find out what the rent comparables are for your house's area and price it accordingly. Rentometer is one such website, but there are a lot of them.

But to answer your question about the 1% rule, take the value of your investment, in this case the cost of your house and the monthly payments should exceed 1% of that value. So you intend to purchase a $100k house. The rents should be greater than 1% of 100K or $1000/month. The 2% rule says $2000/month.

Also keep in mind that there are costs involved in holding your property that exceed just a loss of value. Then there are repairs.  You might think your house is in great shape, but tenants are often very needy and very hard on what's not theirs.  They will sometimes call for a burnt out bulb or a clogged toilet and at 4 in the morning.  Do you know how to screen tenants?  Are you familiar with the Fair Housing Act?  Can your write a lease?  Will you pay a management company or will you self manage?  Plumbers are expensive when it might be a 59c part at Home Depot.

If you bought your house for 200k and it's worth 190k it might still be worth it to sell. Every month it sits there vacant there is the possibility of squatters, thieves and other issues.  If you rent it, true you might be able to get rent to offset the mortgage, but also keep in mind that some lenders will not treat your rent income as rent income until you can prove to them that you have done this for awhile. This might be 2 years of income. So that means, even if you rented it out, you may not qualify for a loan in Florida due to income-to-debt ratios(with rent income excluded). 

I can tell you that it may be cheaper to sell at a loss than becoming an accidental landlord and doing it wrong.  Without knowing more about your situation, it's hard to guess.

Good luck

Brian