Saturday, March 9, 2013

Rental pricing

We often hear questons about why rental prices are high.  In particular, people are often surprised that it costs more to rent a home than to buy a similar home.  There are several reasons for this:
  1. The mortgage payment is lower because the owner invested a substantial amount in the down payment or in improvements to the house.  
  2. There are many costs to own a rental home other than the mortgage payment.  Taxes, HOA dues and repair costs are among those.  For example, the owner may have to absorb multiple-thousand-dollar costs like repainting the exterior every few years.
  3. The owner is taking all of the risk.  When you buy, you can lose money if you need major repairs or the real estate market goes down.  With rent, your cost is fixed regardless of these situations, that are beyond your control.
  4. The owner wants to make a profit.  Some investors are looking for "cash flow" from their rental properties so they price the rent a little above their total costs.   In the past few years, many private owners actually price Below their costs since their objective is just to cover as much of their costs as possible until the real estate market improves.
The monthly payment alone is almost always less to Buy than to Rent a home.  That's IF you have the down payment money, usually about 20% of the sale price, and qualify for a loan.   And IF you don't have to make major repairs.

Another question is "what is a fair rent amount?"  That depends on a lot of factors but, like real estate sale prices, it is mostly related to "comps".  In other words, how much it would cost to rent a comparable home.   Since no two homes are alike, that can be difficult to determine but location, size, number of beds/baths/garages, finished basement, and how updated the home is are key factors.  Two homes that are close on these factors should rent for about the same amount.

There are some general rules of thumb, depending on location.   In Johnson County, Kansas, rent is usually between $0.75 per square foot and $0.90 per sqaure foot.  Average is about 80 cents.  Homes with lots of services and amenities provided by the HOA will be at the higher end as will homes with high-end decor such as granite countertops.  Older homes that have not been remodeled are lower.  So, a "typical" 2000 square foot house in this area will probably rent for $1600-1800/month.  There are exceptions, of course, but you will want to check comparables carefully if rent on the house you are interested in is above or below these averages.

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