Whether you currently own rental property or are considering venturing into the world of real estate investing, you are likely doing so to leverage its vast income-producing opportunities. In order to actually make money off of your investment, however, you must understand how to set the monthly rental amount for each unit to maximize your profits and keep your rental property return on investment (ROI) on target. This important calculation will ensure that you're charging income-producing rent for your rental properties -- a calculation that doesn't just take into consideration your investment and mortgage amounts, but the overall expenses associated with operating the property.
1. Calculate the annual costs of the property. These costs include the yearly mortgage amount, property taxes, homeowner's insurance, maintenance fees and any utility bills you pay for the tenants, such as water, sewer or electricity.
2. Determine what your desired return on investment is for the property. For example, if you invested $20,000 into a home ($15,000 downpayment and $5,000 initial repairs) and you wanted your return on investment to be 25%, you would need to earn a profit of 25% of $20,000, or $5,000 a year, from the property.
3. Add together your total annual expenses for the property and your desired return for the property (in dollars). This is the annual rent you would need to produce from the property to reach your goal. Divide this number by 12 to obtain the monthly rental amount. For example, if your annual expenses for the property equal $20,550 and your desired return is $5,000 (as calculated in Step 2), the amount of money you'd need to collect in rent each year would equal $25,500. Divided into 12 monthly payments, you would need to collect $2,129.17 per month.
4. Compare the rental amount you calculated using this Return on Investment model above with the rental amounts of other properties in the area. Keep in mind that rent prices often vary dramatically from city to city, and even from neighborhood to neighborhood. Tour similar rental properties and browse rental listings to ensure that your rental prices are in line with other properties in the area.
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