Whether a property will be cashflow positive if turned into a rental is usually the first thing potential landlords wonder.
Basically: Can you rent your home to cover the expenses of your mortgage, utility bills, and property taxes AND still earn a little income from the property? Unfortunately, the answer is not an automatic yes. It depends on factors including the average market rental rates in your area, the interest rate on your mortgage, and more.
In this article, we’ll guide you through the essential steps to determine if renting your home can make some financial sense and offer a few strategies to maximize your rental income.
Let’s dig in!
Determine the Monthly and Annual Cost of Owning Your Property
The first step to becoming a landlord is treating your property like a business asset. Just like any other asset, you need to understand the full cost of owning and operating your property on an annual basis.
To do this, you’ll calculate all of the costs associated with the property:
Mortgage Payments: Total mortgage payments for the year including the principal and interest payments.
Utility Payments: All utility costs such as electricity, water, gas, and any other utilities.
HOA Fees: If your property is part of a homeowners association, include these fees.
Maintenance and Improvement Budget: Estimated budget for regular maintenance and any planned improvements.
Property Taxes: Total of your annual property taxes.
Insurance: Your homeowner's insurance costs including any additional coverage you may need as a landlord.
Exterior Maintenance Costs: Include costs for landscaping and snow removal, if applicable.
Add all these costs together to determine the total annual operating expenses for your home. Then, to find the average monthly cost, simply divide that number by 12.
Example Calculation
Let’s say your annual costs are:
Mortgage Payments: $12,000
Utilities: $2,400
HOA Fees: $1,200
Landscaping and Snow Removal: $600
Maintenance/Improvement Budget: $1,500
Property Taxes: $3,000
Insurance: $1,000
Total Annual Operating Costs = $21,700
Average Monthly Cost = $21,700 / 12 = $1,808.33
Determine the Market Value of Your Home
Once you know your operating costs, the next step is to determine the fair market rental value of your property.
There are several ways to do this:
Fill out our free rental analysis form to get a customized report from one of our property managers.
Utilize online rental pricing tools and compare similar properties in your area.
Watch this Youtube video where we break down the steps to determine the market value of your rental.
When in doubt, go with the first bullet point. A comprehensive rental analysis will give you a good estimate of what you can charge for rent.
Are You Cashflow Positive?
Now that you have the fair market rental value and the average monthly cost of operating your home, it’s time to determine if you will be cashflow positive as a landlord.
This part is simple: if the fair market rental value of your property is greater than the monthly operating cost, you are cashflow positive!
If not, it’s time to consider what improvements you can make to your property to increase the potential rental rate.
Improving Your Home for Higher Rent Value
If your calculations show that your rental income will not cover your expenses, you might consider making some improvements to increase the rental value of your home.
Here are a few solid strategies to consider:
Improve Curb Appeal with Landscaping
Enhancing your home’s exterior can make it more attractive to potential residents.
A well-maintained lawn, colorful flower boxes, and carefully trimmed hedges can make your home feel that much more welcoming and help your property stand out from the crowd.
Refresh Interior with New Paint and Updated Fixtures
A fresh coat of paint and modern fixtures can dramatically improve the appeal of your home. Neutral colors are generally best, because they appeal to a wider range of residents.
Updated fixtures in the kitchen and bathrooms can also make a positive impact.
Enhance Amenities with New Appliances
Installing new appliances can make your home more attractive and help justify a higher rent.
Residents are usually willing to pay more for modern conveniences like a new washer and dryer, dishwasher, or high-efficiency HVAC systems.
Add Bedrooms and Bathrooms
Converting existing spaces like offices or lofts into additional bedrooms or bathrooms can often increase the rental value. Higher bedroom and bathroom counts usually equate to higher rental prices because they increase the property’s functionality and appeal to larger families or groups.
Final Thoughts: Creating a Cashflow Positive Rental Property
Becoming a landlord and ensuring your property rents at a cashflow positive rate comes down to strategy, analysis, and, sometimes, thoughtful improvements. Whether your current property could be profitable right off the bat or could use some TLC, there is a pathway to cashflow positive status!
To dive deeper into this exercise, you can check out our Cashflow Calculator. And if you want to further maximize your rental income with minimal hassle, consider hiring a professional property manager like Evernest to handle the marketing and leasing of your property. This way, you can enjoy all the benefits of passive income without the day-to-day responsibilities of property management.
Head to our website to find the Evernest team in your area and get started today!