If you are considering investing in rental properties, you may have heard of the one percent rule — a standard way to calculate the base rent amount to charge your tenants.
Like any rule, this one has some exceptions, but it’s an excellent tool, particularly for new landlords. While you’ll need to consider multiple factors in your rent price, the one percent rule is an excellent place to start.
What Is the One Percent Rule?
The one percent rule states that your base rent should roughly equal the purchase price of the property (plus necessary repairs) multiplied by one percent. So if purchasing your property and renovating it cost you $200,000, your base rent should be around $2,000 per month. Otherwise, you may run into cash flow issues in the future.
This amount should, at a minimum, pay your monthly mortgage on the property, although ideally, you would do better than simply break even. You will need to budget for maintenance and repair costs each year besides your monthly payments to the bank. These considerations are key to maintaining a healthy revenue stream.
Following the one percent rule also helps you pay off the property promptly. By the time you make 100 payments, which happens in approximately 8.3 years, you should own the property outright.
Exceptions to the One Percent Rule
The one percent rule is an excellent guide, but other factors can affect how you determine rent.
The location of the property certainly matters. For instance, comparable homes in the area may go for $1800 per month. To find a qualified renter, you might have to lower your price by several hundred dollars.
You should also consider your property tax bill. Depending on where you live, this yearly expense can be high. Rental properties in California are an excellent example. You may need to raise your rent above the one percent rule to make leasing your property worthwhile.
Properties in your area could be in high demand, meaning you can charge a higher rental rate and still attract renters. The demographics of your area matter as well. Are the residents young or old? Middle or working class? Education levels matter as well. If your property is in an area of modest incomes, take that factor into consideration when you set your rental rate.
If you’ve miscalculated your expenses, you can make adjustments such as raising the rent each year or every few years. Inflation will also influence your price.
Remember, you need to set the rental rate high enough to ensure you break even each year until you pay off the property. Once you no longer have a mortgage, you will have more flexibility in setting your rates.
How Amanica Can Help
Amanica is an expert in rental properties in California. We offer quality rental listings, property management and real estate sales. We are a full-service company that can help you find the right property for your needs.
For more information, fill out our brief online form, or call 888-744-9712. At Amania, our friendly associates provide superior customer service as you search for your next property.