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Steve McLinden, the Bankrate.com Real Estate AdviserHow much should you charge for home rental?

Dear Real Estate Adviser,
We are considering renting out our home for one year. Is there a good formula to figure out exactly how much to charge for rent to make it worth our while?
-- Candace

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Dear Candace,
A good rule of thumb, according to landlord and rental research, is to charge no less than 1.1 percent of the home's value up to about $100,000 ($1,100), 1 percent up to about $125,000 ($1,250), and a slightly smaller percentage as you climb the home-value ladder.

For example, homes valued at $150,000 to $175,000 usually would rent for 0.9 percent of value (150,000 x 0.009) or $1,350 to $1,575, while you'd only get, at an average, about 0.75 percent ($3,000) for a $400,000 home (400,000 x 0.0075).

Why the sliding scale? It's harder to rent the higher-priced homes for 1 percent or more of value because the renter universe diminishes substantially as price points increase.

Of course, the rent you can charge depends heavily on local rental-property demand, the economy, the health of your local housing market, plus the location and condition of your house. Optimally, you'd get a 1.25 percent return each month in a very high-demand market.

Be wary, though. Anything less than 0.8 percent (0.008) gives you no buffer in the event of abrupt move-outs, vandalism, rises in interest rates and other negative scenarios. As you can see, with such small profit margins, there's little margin for error in the renting-a-house game.

Before you set your rate, scour the market well for comparable rental houses, looking in the newspaper, in local rental guides and checking online listings to see what other landlords are asking. Call the phone numbers listed for those rental homes in your area a few weeks after they were first listed, and see if they have been rented yet. If they rented too quickly, it may mean they were too cheap. If they're languishing on the market, it may mean rents are too high. It's a delicate balancing act, as you can see.

In a healthy market, you can afford to start a little high on price and then come down if need be. (You might even enlist a Realtor for help with pricing.)

There are numerous other considerations, such as the credit and employment checks for prospective tenants, damage or security deposits, pet deposits, etc. For a more thorough rundown, see Bankrate's own stories on the subject, including "Rookie landlords face big challenges" and "7 questions for would-be landlords."

Ideally, you should lease to a tenant you know and trust, though that's not always possible. But regardless, make sure you are upfront that the house will only be available for a year.

There are also numerous tax implications, for which you may want to consult a financial adviser, and liability insurance issues to research as well.

I hope you'll make it through that one year unscathed. Good luck.

To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page, and select "buying, selling a home" as the topic.

Bankrate.com's corrections policy -- Posted: March 25, 2006
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