A formula - Posted by Bill Gatten
Posted by Bill Gatten on August 31, 2000 at 19:31:57:
Dave here is how I do it. 'Just did it this morning, on a property I just picked up, as a matter-of-fact.
This is a rule of thumb that varies upward or downward depending upon rental property availability and desirability (i.e., recreational areas, seasonal area, etc. would be excluded from this method).
The following formula probably may need to be calibrated for your area: if so, consider calling 5-10 rental property ads (in your rental range) and explain that you are a new investor with a rental property, and that you?d like to ask them how they figured out the rent to charge. Then, somewhere in the conversation find out about how much the property is worth relative to the rent they?re asking. 5 or 10 should be enough to average-out in order to see if the formula works. You might need to adjust it by a 10th of a percent or so.
In most geographical areas, on a $50K property you could charge between 1.0% to 1.4% of the property’s value; for a 100K property the safe range would likely be between 0.9 and 1.1% of the property’s value; on a 200K property about O.75 to 0.9% percent; on 300K property o.6 to 0.75%; a million dollar property about .03% to .04%.
The reason this almost always works out every where we go, is because Fair Market Rent is, to quite a large degree, a reciprocal function of the median income tax range in a given geographical area. That is to say that when incomes in an area are higher, a typical property owner needs to collect less rent, percentage-wise, in order to break-even relative to his tax benefits, than would a low income landlord (lower tax bracket area). Therefore, in lower income areas, rents are proportionately higher as a percentage of FMV, because the tax write-off benefit is so much less for the owner. And one learns early in the game that if he tries to charge more than the next guys does for a similar property, his vacancy rate goes up and eats up his profit: if he charges too little, he has no vacancies, but his profit suffers. So the idea is to hit it juuussstttt right if you can.
Bill Gatten
P.S. BTW, when you’re calling these folks, you might ask if any have given any thought to selling.