When investing in rental properties I look for properties that will rent in the ‘sweet spot’. By this, I mean properties where I get the best return on my investment. In my area, that is between $600 and $900 per month. When renting for less than $600 manypeople that apply have a poor rental payment history and a history of evictions. Once the rent goes over about $900 the pool of prospective tenants shrink and it becomes hard to rent the property.
If the rent is under $600 per month the cash flow generated is usually too small for the effort. Once I get over about $900 I find that the return on invest drops on the property. I will illustrate the point with two examples.
Suppose I buy a house valued at $75,000 for 70% of value. I pay $53,000 for it and rent it at $900 per month (I have two like that now). My gross rent is over 20% of what I spent on the property. Also, this house rents quickly because the pool of renters is large in this rent range.
Now, if I buy a $225,000 house for 70% of value I will have spent $158,000. To get the same 20% gross rent I would have to charge $2,600 per month. That would be almost impossible in my area. The house may rent for $1,500 but it will be very hard to find tenants. And the $1,500 rent represents a yearly gross rent of less than 12% of what I spent on the house.
If I can spend 158,000 on rental property I would be better buying 3 houses that rent for 900. My monthly rent would be $2,700. That is 80% more than buying the single expensive house. Of course, I will probably get more market appreciation on the more expensive house, but this is usually less than 5% (and negative recently).
These are actually numbers from my area. The rent ranges in other areas may vary. However, there should always be a sweet spot for the rent amount.
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